UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549 FORM 20-F
(Mark One)
[_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934 OR FORM 20-F
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002. OR[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________TO
----------------------------------------------------------------
| COMMISSION FILE NUMBER 0-31082 |
----------------------------------------------------------------
VI GROUP PLC
------------
(Exact name of Registrant as specified in its charter)
REGISTRAR OF COMPANIES FOR ENGLAND AND WALES
--------------------------------------------
(Jurisdiction of incorporation or organization)
THE MILL, BRIMSCOMBE PORT, STROUD, GLOUCESTERSHIRE GL5 2QG, UK
--------------------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
ORDINARY SHARES, NOMINAL VALUE OF 0.5 PENCE PER SHARE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or ordinary stock as of the close of the period covered by the annual
report. AS OF DECEMBER 31, 2002 THERE WERE 37,261,166 SHARES OF THE COMPANY'S
ORDINARY SHARES OUTSTANDING AT A NOMINAL VALUE OF 0.5 PENCE PER SHARE.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [_] Item 18 X(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Yes [_] No [_] NOT APPLICABLE
P-->

INTRODUCTION
VI Group plc is a public limited company incorporated in England, which
conducts its operations through subsidiaries. The term "VI Group" or the
"Company" as used in this Annual Report on Form 20-F (the "Annual Report")
refers to VI Group plc and/or its subsidiaries, as appropriate.
The consolidated financial statements of the Company as of and for the year
ended December 31, 2002 are presented in conformity with generally accepted
accounting principles in the United States ("US GAAP").
The principal office of the Company is located at The Mill, Brimscombe
Port, Stroud Gloucestershire GL5 2QG, United Kingdom and its telephone number is
011-44-1453-732900.
ii
P-->

B. Not applicable
C. Not applicable
D. Risk Factors
------------
FORWARD LOOKING STATEMENTS
This Annual Report contains forward-looking statements relating to the Company's
operations that are based on management's current expectations, estimates and
projections about the CAD/CAM software business in the mechanical engineering
sector. Words such as "anticipates", "expects", "intends", "plans", "targets",
"believes", "seeks", "estimates", and similar expressions are intended to
identify such forward-looking statements. These statements are not statements
of fact or guarantees of future performance and are subject to certain risks,
uncertainties and other factors, some of which are beyond our control and are
difficult to predict. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward-looking
statements. You should not place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Unless legally
required, the Company undertakes no obligation to update publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Among the factors that could cause actual results to differ materially are the
effects of any failure by the Company to upgrade its products quickly enough to
keep pace with changes in software technology in the Company's market, the
effects of larger companies requiring their sub-contractors to conform to the
existing CAD/CAM systems of such large companies, patents, copyrights or
intellectual property rights owned by others, the availability and cost of
financing for the Company's operations, capital expenditures and future
acquisitions, termination of licensing agreements for software components
utilized by the Company, termination of distribution relationships, the ability
of the Company to attract and retain necessary skilled employees and currency
fluctuations. In addition, such statements could be affected by general
domestic and international economic and political conditions. Unpredictable or
unknown factors not discussed herein also could have material adverse effects on
forward-looking statements.
THE COMPANY'S PRODUCTS MAY BE RENDERED OBSOLETE IF THE COMPANY IS UNABLE TO
UPGRADE ITS PRODUCTS QUICKLY ENOUGH TO KEEP PACE WITH THE RAPIDLY CHANGING
SOFTWARE TECHNOLOGIES OF THE CAD/CAM MARKET.
Software technologies in the rapidly changing CAD/CAM market for the mold
and die sector can become obsolete or less competitive if not regularly
advanced. The Company's internal development aims to ensure that its products
are continually upgraded to take account of changes, while the product
development of competitors is also monitored.
Despite the Company's commitment to development there are dangers that mold
design or manufacturing processes and technologies may change or be introduced
which shorten the expected life time of the Company's products.
THE POTENTIAL MARKET FOR THE COMPANY'S PRODUCTS COULD BE SUBSTANTIALLY
REDUCED IF LARGER COMPANIES REQUIRE THEIR SUB-CONTRACTORS TO CONFORM TO THEIR
EXISTING CAD/CAM SYSTEMS.
3
P-->

The Company is exposed to the risk that larger companies, who have
extensive design and management systems, may require that their sub-contractors
and suppliers use the same CAD/CAM systems used by those companies. In this case
the potential market for the Company's products would be reduced. At present,
most of the Company's customers are not generally under this pressure which
applies particularly in the upper tier supplier levels of the automotive sector.
IF THE COMPANY FAILS TO PROTECT ITS INTELLECTUAL PROPERTY RIGHTS, OR IS
UNABLE TO OBTAIN THE RIGHT TO USE TECHNOLOGIES OWNED BY OTHERS, ITS BUSINESS
COULD BE MATERIALLY IMPAIRED. THE COMPANY'S INTELLECTUAL PROPERTY RIGHTS MAY NOT BE ADEQUATELY PROTECTED.
THE COMPANY PRESENTLY DOES NOT HOLD ANY PATENTS OR COPYRIGHTS, NOR DOES THE
COMPANY INTEND TO OBTAIN ANY PATENTS IN THE FUTURE. The Company however, does
have common law copyright protection for all of its software. The Company also
attempts to protect its proprietary rights to its software with license
agreements and with the registration of trademarks. The licensing agreements
between the Company and its customers typically provide that the Company retains
the proprietary rights to the software. Nonetheless there is a possibility that
disputes may arise regarding the ownership of the software. The Company also has
developed technical safeguards and password requirements within the software
itself that are designed to prevent unauthorized use of the software and aim to
ensure the integrity of the systems.
An entity which reverse engineers the Company's software would be able to
copy and re-market the software in direct competition with the Company. This
risk is most relevant in developing countries where legal remedies are weakest
and the technical support for the maintenance and repair of the products is not
perceived as fundamental.
The Company has developed and utilizes software in collaboration with
various software developers. In this case the Company has entered into
agreements that provide for the Company's right to market and distribute the
products containing these component technologies. However, it is possible for
disputes to arise in relation to the validity of these rights.
THE COMPANY'S SOFTWARE PRODUCTS MAY INFRINGE ON THE INTELLECTUAL PROPERTY
RIGHTS OF OTHERS.
Companies in the technology industry frequently receive claims of patent or
copyright infringement or the infringement of other intellectual property
rights. In this regard, third parties may in the future assert claims against
the Company regarding its existing products or with respect to future products
under development. The Company has entered into indemnification obligations in
favor of some customers that could be triggered upon an allegation or finding
that it infringed on the other parties' proprietary rights. Thus, the Company
may receive notification of alleged infringements in the future. The Company may
not in all cases be able to resolve such allegations through licensing
arrangements, settlement, alternative designs or otherwise. The Company may take
legal action to determine the validity and scope of the third party rights or to
defend against any allegations of infringement. In the course of pursuing any
of these means the Company could incur
4
P-->

significant costs and diversion of its resources. Due to the competitive nature
of the industry, it is unlikely that the Company could increase its prices to
cover such costs. In addition, such claims could result in significant penalties
or injunctions that could prevent it from selling some of its products in
certain markets or result in settlements that require payment of significant
royalties that could adversely affect the Company's ability to price its
products profitably.
IN ORDER TO FUND THE COMPANY'S OPERATIONS AND BROADEN THE RANGE OF, AS WELL
AS UPGRADE, ITS PRODUCTS, THE COMPANY MAY NEED ADDITIONAL CAPITAL IN THE FUTURE
THAT MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS, IF AT ALL. The Company may need additional capital in the future to fund its
operations, finance investments in equipment and corporate infrastructure, to
increase the range of products it offers and respond to competitive pressures
and perceived opportunities. Cash flow from operations may not be sufficient to
cover the Company's operating expenses and capital expenditure needs. Any needed
additional financing may not be available on terms acceptable to the Company, if
at all. If the Company raises additional funds by selling equity securities,
the relative equity ownership of its existing investors could be diluted and the
new investors might obtain terms more favorable than previous investors. If the
Company raises additional funds through debt financing, the Company could incur
significant borrowing costs. A failure to obtain additional funding could
prevent the Company from making expenditures that allow it to grow its business,
maintain its operations or to make acquisitions in order to strengthen its
position in the market and achieve its strategic goals.
THE CAD/CAM MARKET IN WHICH THE COMPANY OPERATES IS HIGHLY COMPETITIVE,
WHICH COULD RESULT IN LOST SALES AND LOWER REVENUES.
The development of software to enhance design and manufacturing processes
is highly competitive. The Company faces competition from numerous companies for
all of its products. The risk factors in relation to competitors varies broadly
according to the two principal types of competitor that the Company faces and
can be classed according to their approach to the market.
The first type of competitor approaches the full range of industrial
sectors involved in mechanical engineering and that benefit from CAD/CAM
technology in that they provide generic solutions to those companies designing
or making mechanical systems and components. This type of competitor includes
the largest CAD/CAM suppliers such as Parametric Technology, Dassault Systemes
of France and Unigraphic Solutions Inc. Such companies have substantially
greater manufacturing, financial, marketing and research and development
resources than the Company.
The second type of competitor offers tailored solutions to the mold and die
sector. This type of competitor includes Cimatron (USA) and Delcam (UK) and
Missler (France). These companies may offer new or improved features which are
specific to the Company's chosen sector and may cause a decline in revenues
until such time as the Company can offer similar facilities.
New competitors have only rarely appeared over recent years but this
possibility could require the adoption of newer technologies and additional
development costs to minimize the sales effect of any new entry.
5
P-->

A DISRUPTION IN THE SUPPLY OF PRODUCTS FROM THE COMPANY'S SUPPLIERS OR
PRICE INCREASES FOR SUCH PRODUCTS COULD AFFECT PROFITABILITY.
The strength of the Company's relationship with its dealers and suppliers
is a significant factor in the Company's profitability. The Company's current
arrangements with these dealers and suppliers are not guaranteed to remain in
place long term. There are about 60 distributors employed by the Company with
most agreements requiring between six months and one years notice of
termination. One distributor Mecadat Gmbh (11%) represented 10% or more of
revenues in 2002. These distributors maintain networks of dealers, which could
continue the business in the regions if they no longer wished to follow the
business. If this distributor terminates its existing agreement with the
Company, the Company could suffer a temporary but significant loss of revenue.
THE TERMINATION OF THE COMPANY'S LICENSING AGREEMENTS FOR TECHNOLOGIES FROM
THIRD PARTIES COULD RESULT IN SIGNIFICANT COSTS, DELAYS IN PRODUCT DEVELOPMENT
AND EFFECT THE COMPANY'S PROFITABILITY.
At present the Company licenses a number of component software technologies
from third parties. Each of these component libraries are licensed under
agreements. The Company considers that early termination by a third party of any
of the five material agreements is unlikely, however, replacement of such
licenses may involve a delay in delivering products containing new libraries
with consequential revenue losses and profitability effects. No material
agreement has a specific termination date earlier than June 2003 and all
material agreements are renewable beyond the term of the current agreement.
Where the Company believes the library to be critical to the Company's
overall success or where it would be particularly difficult to replace (2
agreements) the Company has made suitable arrangements to obtain the source
codes and rights to incorporate the library in the event that the supplier fails
to continue its development. No guarantee can be made that the Company will be
able to correctly integrate these source codes with the Company's products and
in these circumstances could also result in delaying the production of new
products and cause additional engineering expenses.
In the future, the Company may need to obtain further license rights to
patents or other intellectual property held by others. Unless the Company is
able to obtain such licenses on commercially reasonable terms, patents or other
intellectual property held by others could inhibit the Company's development.
Licenses granting the Company the right to use third-party technology may not be
available on commercially reasonable terms, if at all.
THE CURRENT DEPRESSED GENERAL ECONOMIC AND MARKET CONDITIONS COULD CAUSE
DECREASES IN DEMAND FOR THE COMPANY'S PRODUCTS, WHICH COULD NEGATIVELY AFFECT
THE COMPANY'S REVENUE AND OPERATING RESULTS.
Downturns in general economic and market conditions such as those being
experienced at present may result in customers postponing or cancelling software
purchasing decisions. If demand for the Company's products decreases, the
Company's revenues may decrease and operating results would be negatively
impacted.
THE COMPANY EXPECTS TO ACQUIRE BUSINESSES AS PART OF ITS BUSINESS STRATEGY
AND
6
P-->

WILL NEED TO INTEGRATE THEM SUCCESSFULLY OR ITS BUSINESS AND RESULTS OF
OPERATIONS COULD SUFFER.
Acquisitions are an integral part of the Company's business strategy. The
Company is actively engaged in identifying and evaluating potential acquisition
candidates. Any potential acquisition could be material in size and involve the
issuance of significant new debt or equity securities and/or the payment of
substantial cash consideration. If the Company funds acquisitions in whole or
in part through the issuance of equity securities, its existing shareholders may
experience substantial dilution. If the Company raises additional funds through
debt financing, the Company could incur significant borrowing costs. The
Company may also be required to make significant investments in acquired
companies to facilitate commercialization of its own products or to support the
integration of the acquired company's operations with the Company's operations.
Any acquisition may also involve significant management time and attention,
which could cause a disruption to the Company's overall operations.
Although the Company has had no particular difficulties in absorbing prior
acquisitions, the Company recognizes that integrating different businesses or
software products from future acquisitions could prove difficult to manage and
runs the risk of delaying current product projects.
If the Company is unable to successfully integrate any newly acquired
business or technologies, it may be unable to achieve its strategic goals and
its business could suffer.
COMPETITION FOR SKILLED EMPLOYEES IN THE CAD/CAM INDUSTRY IS INTENSE, AND
THE COMPANY MAY HAVE DIFFICULTY ATTRACTING AND RETAINING THE SKILLED EMPLOYEES
IT NEEDS TO EXECUTE ITS GROWTH PLANS. The Company's future success will also depend on its ability to attract,
retain and motivate highly skilled employees, particularly engineering and
technical personnel. Competition for such employees in the Company's industry
is intense and many companies use aggressive recruiting techniques. The Company
has from time to time experienced, and expects to continue to experience in the
future, difficulty in hiring employees with appropriate technical
qualifications. In particular, the Company's Italian development group has
recently been forced to expand its search for experienced programmers to a
national level rather the local area previously canvassed. The Company may not
be able to retain its key employees or attract, assimilate or retain other
highly qualified employees in the future. If the Company does not succeed in
attracting and retaining skilled personnel, its ability to operate and expand
its business could suffer. Furthermore, the Company's recruitment of employees
from its competitors could be challenged by their former employers, which could
result in litigation costs and the loss of those employees.
THE COMPANY GENERATES A SIGNIFICANT PORTION OF ITS REVENUE OUTSIDE THE
UNITED KINGDOM AND IS THEREFORE SUBJECT TO ADDITIONAL RISKS ASSOCIATED WITH THE
EXTENT OF ITS INTERNATIONAL OPERATIONS. The Company's revenue and results of operations are subject to fluctuations
in general economic conditions in the various areas of the world in which it
does business. The risks inherent in conducting international business generally
include longer payment cycles,
7
P-->

greater difficulties in accounts receivable collection and enforcing agreements,
tariffs and other restrictions on foreign trade, export requirements, economic
and political instability, withholding and other tax consequences, restrictions
on repatriation of earnings and the burdens of complying with a wide variety of
foreign laws. Such risks are higher from areas outside of the United States and
member countries of the European Union, which accounted for 16% of revenues in
2002, 21% of revenues in 2001 and 24% in 2000. The majority of such revenues
were from countries in Asia where the revenues fell by close to 18% during 2002
compared to 2001, whereas in 2001 revenues were 9% lower compared to 2000.
CURRENCY FLUCTUATIONS MAY ADVERSELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS. The Company is exposed to the risk of fluctuations in foreign currency
exchange rates due to the international nature and scope of its operations. In
the future, the Company expects to continue to derive a significant portion of
its net revenue and incur a significant portion of its operating costs outside
the United States, and changes in foreign currency exchange rates may have a
significant effect on the company's results of operations.
As a result of the strengthening Euro relative to the US dollar, during
2002 the revenue growth was 21% when presented in US dollars, whereas had the
currency rates remained similar to those in 2001 it would have been17%.
As a result of the weakening Euro relative to the US dollar, during 2001
the revenue growth was 11% when presented in US dollars, whereas had the
currency rates remained similar to those in 2000 it would have been 17%.
Also, as a result of the weakening Euro relative to the US dollar, during
2000 the revenue growth was 15%, whereas had the currency rates remained similar
to those in 1999 it would have been 26%.
Due to the fact that costs and revenues are matched to a significant
extent, the overall effect on net income was much less significant than the
effect on revenues.
The extent of exchange gains and losses arising on foreign currency
transactions and included in determining net income were a loss of $27,000 in
2002, a loss of $10,000 in 2001, and a gain of $77,000 in 2000.
THE EFFECT OF SEVERE ACUTE RESPIRATORY SYNDROME (SARS) ON THE MARKET FOR
THE COMPANY'S PRODUCTS
Severe Acute Respiratory Syndrome is a disease for which there is currently no
known remedy and has originated in the Far Eastern countries during the early
part of 2002. Health authorities (including the World Health Organization),
governments and immigration departments have placed travel restrictions or
travel recommendations on people travelling to or from the most affected
countries and regions. This has caused the postponement of business trips and
the cancellation of important trade exhibitions, some of which are important to
the mold and die sector that is the target market for the Company's products. If
SARS spreads further, causes further cancellations and remains un-remedied then
VI revenues and earnings may fall or suffer as a result of the restrictions on
travel or isolation of some market areas.
8
P-->

ENFORCEABILITY OF CIVIL LIABILITIES UNDER THE U.S. FEDERAL SECURITIES LAWS.
The Company is a public limited company incorporated under the laws of
England and Wales. A majority of the Company's directors and executive officers
named in this Annual Report are residents of countries other than the United
States. All or a substantial portion of their assets and the Company's assets
are located outside the United States. As a result, it may not be possible for
a shareholder:
- to effect service of process within the United States upon the Company or a
majority of its directors and executive officers;
- to enforce in the United States courts or outside the United States
judgments obtained against the Company or a majority of the Company's
directors and executive officers in the United States courts in any action,
including actions under the civil liability provisions of United States
securities laws; or
- to enforce in the United States courts judgments obtained against the
Company or a majority of the Company's directors and executive officers in
the courts in jurisdictions outside the United States in any action,
including actions under the civil liability provisions of United States
securities laws.
- Parties may also have difficulties enforcing liabilities under the United
States securities laws in original actions brought in courts in
jurisdictions located outside the Unites States.
The Company has been advised by Addleshaw Goddard, its English legal
counsel, that there is doubt as to the enforceability of liabilities
against the Company and/or its directors and executive officers in the
United Kingdom in original actions or in actions for the enforcement of
judgments of United States courts predicated upon the federal securities
laws of the United States. In particular, English law significantly limits
the circumstances under which shareholders of English companies may bring
derivative actions. Under English law generally, only the Company can be
the proper plaintiff in proceedings in respect of wrongful acts committed
against the Company.
THE RIGHTS OF THE COMPANY'S SHAREHOLDERS MAY DIFFER FROM THE SHAREHOLDER
RIGHTS OF A U.S. CORPORATION.
The rights of shareholders are governed by English law, including the
Companies Act 1985, and by the Company's Articles of Association. These rights
differ in many respects from the rights of shareholders in typical U.S.
corporations.
ITEM 4. INFORMATION ON THE COMPANY.Introduction
------------
The Company designs, develops, manufactures, markets and supports a family
of modular, high-performance, fully integrated computer-aided
design/computer-aided manufacturing software ("CAD/CAM") focused on the mold and
die sector. The Company's products provide an integrated
design-through-manufacturing solution for small-to-medium-
9
P-->

sized companies and manufacturing divisions of large corporations. These product
lines provide customers with a wide array of design and building capabilities
that are adaptable to many types of machining techniques and tools. As a result,
the Company's products are especially popular in the manufacturing segment of
the CAD/CAM market, particularly among mold, tool, die and fixture makers. The
Company is committed to providing mold, tool, die and fixture makers with
comprehensive, cost-effective CAD/CAM solutions that streamline manufacturing
cycles, enable collaboration with vendors and decrease delivery time.
The Company's revenue has increased every year since its foundation in
Italy in 1988 with both its product range and sales network expanding to compete
in nearly all of the world's leading industrial markets. At present, the Company
has subsidiaries in the UK, Italy, the US and Japan and sales offices in France.
A. History and Development of the Company
--------------------------------------
The legal and commercial name of the Company is VI Group plc and its date
of incorporation was November 5, 1997 as Deepcredit Limited. The Company is
domiciled and operates under the laws of the United Kingdom specifically
pursuant to the Companies Act of 1985. The Company was created to consolidate
and re-organize Vero International Software S.r.l. (hereinafter "Vero") and its
subsidiaries in the U.K. and the U.S. with the U.K. entity becoming the parent
company. On February 25, 1998 the name of the Company was changed to VI Group
Ltd. On March 16 1998 the Company was re-registered as a public company limited
by shares. Its principal place of business is: The Mill Brimscombe Port,
Stroud, Gloucestershire, GL5 2QG, U.K., the telephone number is
011-44-1453-732900.
Vero was founded in Northern Italy in October 1988 by one of its current
executive directors and a former executive director: Donald A. Babbs and Ezio
Galardo respectively, under the name Vero. By 1990, Vero had opened a UK sales
office and had a growing Italian user base. Vero traditionally developed its
products for the promising, but technically demanding personal computer, ("PC")
market. Vero was one of the world's early purchasers of a compiler which broke
the 640 Kbytes memory barrier leading to Vero's development of the edge surface
modeler. The modeler was soon incorporated with machining software to provide
one of the first surface machining software packages on the PC.
The development of the modeler further fueled sales which grew steadily
through the early nineties. Thereafter, Vero took a further technology step by
incorporating a solid modeler in its products in 1995, which maintained its
competitive advantage and growth. As a dedicated PC software provider Vero
quickly adopted the de-facto Windows standard, as it became available. Vero
established relationships with important distributors in Japan and the Far East
in the mid-nineties and spread its geographic coverage to the United States for
the first time in 1997. Funding for the Company initially came from the
founders, bank loans and cash flow.
The Company completed its reorganization and made a fully subscribed and
successful public offering as VI Group plc. (the name "Vero" being unavailable)
on the London Stock Exchange's Alternative Investment Market ("AIM") in April of
1998. The Company issued 5,600,000 ordinary shares of 0.5p per share at a price
of 50p per share and raised $4.0 million after expenses.
10
P-->

Thereafter, the Company moved its commercial activities and headquarters
from Italy to England in the same year. Ultimately, the Company has utilized the
proceeds of the public offering in its expansion worldwide including marketing
and sales activities, relocation and office expansion and supplementing its
working capital. The Company also used approximately $900,000 of the proceeds of
the offering to purchase minority interests in the subsidiary companies,
including fees.
In May 2000, the Company acquired an Italian software company, called Vero
Technologie S.p.A. (formerly known as Tecnocam, S.p.A.) for 360,000 ordinary
shares of the Company and $349,000 in cash to secure valuable products and
knowledge and experience in the field of progressive die design.
On March 2, 2001 Ubiquity Software Corporation Ltd a UK company, sold the
assets of its Electronic Data Interchange (EDI) division to Vero International
Software UK Ltd, a UK subsidiary of the Company ("VERO UK"). The EDI division
sells software and systems for the secure transfer of CAD and CAM files data for
the automotive industry in the United Kingdom. This division was purchased by
VERO UK for a total consideration of $361,000.
On May 7, 2002, the Company successfully completed a placing in the United
Kingdom of 14,651,166 ordinary shares of 0.5 pence, raising $4.6 million before
expenses
On July 1, 2002, the Company's U. S. subsidiary, Vero International, Inc.
acquired the Company's Canadian distributor Vero Tooling Solutions, Inc. for the
nominal sum of one dollar plus the assumption of debt in the amount of $355,000
and forgiveness of debt in the amount of $259,000 and entered into employment
agreements with the two former owners. The acquired subsidiary will continue to
sell the Company's software in the Toronto area and will be integrated with the
Company's Michigan office and headquarters of Vero International Inc.
On August 29th, 2002, the Company sold its Prague based Czech company VISI
Sro to the management of that office for a consideration of $33,000 to be paid
over three years. VISI Sro will continue to sell the Company's product as part
of a distribution agreement for the area.
On August 1, 2002the Company opened a branch offices in Lyon and Lille in
France. The offices will provide sales and support services for the French
market.
On September 28th 2002, the Company acquired the Machining Strategist 3D
CAM business of NC Graphics (Cambridge) Ltd. and Arthur Flutter of England . The
acquisition included goodwill, interests in copyrights , transfer of 8 staff
including the development team employees, transfer of 8 foreign dealer
agreements and UK based end-user customers. Total consideration was 1.25 million
pounds (approximately $1.87m) with 1.0 million pounds (approximately $1.5m)
being paid in cash and 250,000 pounds (approximately $0.37m) in ordinary shares
of the Company. Proceedings have been initiated against the Company by NC
Graphics (Cambridge) Limited ('NCG') for the payment of disputed invoices
arising from the acquisition by the Company of NCG's Machining Strategist
business, totalling $172,000 It is the Directors' view that this claim is
without merit and the Company has advised, through its solicitors, of its
intention to vigorously defend this claim. The Company has notified NCG of its
intention to pursue, as part of these proceedings, a counterclaim for
substantial damages arising from NCG's failure to comply with certain terms of
the agreement relating to the acquisition of the Machining Strategist business.
11
P-->

On October 28th, 2002, the Company successfully listed its American
Depositary Shares (ADS's) on the American Stock Exchange with each ADS
representing 20 of the Company's ordinary shares.
On January 10th, 2003 the Company issued a convertible debenture of $1.0m and
entered into an agreement, subject to approval by existing stockholders at an
extraordinary general stockholder meeting for a possible further investment of
between $2.0m and $4.0m in newly created preference share In the event that the
Company does not receive shareholder approval for the creation of the above
preference shares the convertible debenture will be repaid and the Company will
pursue other sources which may be available to it in its attempt to secure
financing in the United States or in England in order to fund potential
acquisitions. If another source of financing is not available the Company will
not be in a position to pursue significant acquisitions.
The Company ended its long term distribution agreement in Japan by
executing a termination agreement with the existing distributor on November 6th
2002 to become effective on April 1st 2003. The Company successfully applied for
and set up a wholly owned Japanese based subsidiary , Vero Japan kk to carry on
the work previously undertaken by its former Japanese distributor. The newly
formed subsidiary was registered in Tokyo on April 1st 2003.
There have been no public takeover offers of the Company to date.
Investments in property, plant and equipment amounted to $701,000,
$282,000, $149,000 during 2002, 2001 and 2000 respectively.
Expenditures on research and development amounted to $1,439,000, $1,260,000
and $1,563,000 during 2002, 2001 and 2000 respectively. The increase in
expenditures in 2002 was as a result of the OEM agreement with NC Graphics
(Cambridge) Ltd and three months of operations of the Cambridge Technology
Centre following the acquisition of the Machining Strategy business. These costs
accounted for approximately 41% of the increase, in the ongoing product
development activity.
There are currently no major contracts or investments in progress other
than general renewal and maintenance of existing assets and purchases made to
equip new employees.
B. Business Overview
-----------------
OPERATIONS AND PRINCIPAL ACTIVITIES. The Company designs, develops and supplies CAD/CAM software intended for use in
the mechanical engineering sector. Except for the newly acquired Machining
Strategist product the Company markets its products as modular software packages
under its trademark VISI-Series. These products offer high performance
facilities for the design and manufacture of mechanical components and tools,
using standard Windows TM based computer platforms.
Background to the Development of CAD (Computer Aided Design)/CAM (Computer
Aided Manufacture). Over the last 30 years CAD/CAM has revolutionized
engineering
12
P-->

design and methodology. In the 1970's engineers designed components, as well as
the tools and processes used to manufacture them by hand on sheets of paper.
Today, fast and extremely accurate computerized design and production of complex
components is an everyday requirement for engineers. CAD/CAM software enables
manufacturers to manage the entire operation on computers, from the designers'
first sketches, through mechanical design to production planning.
Many manufacturers of mechanical components follow design and building
processes in which each phase is distinct but highly integrated. The process
normally begins with the conceptual design of a product followed by a detailed
study of its component parts and, on occasions, by the production of a
prototype. The prototype is then examined to evaluate the original design, this
may lead to improvements or specification changes. Next the production planning
of components, including the specification of tools, fixtures, molds and dies,
is undertaken. The item, or its mold form, is machined and finished, readied for
assembly, tested and shipped.
Manufacturers are continually under pressure to reduce the time taken for
the design and building processes, as well as to produce a higher quality
product at lower cost. These market pressures have lead to the search for more
efficient methods either to integrate these processes or to perform them
concurrently, hence the development of CAD/CAM technologies. When CAD/CAM
technologies first became available they were relatively expensive and complex
to implement, therefore primarily larger companies were able to use them. These
larger companies encouraged their traditional sub-contractors to invest in the
emerging CAD/CAM technologies and, as a result, lower cost systems (albeit with
lower functionality) began to emerge in the 1980's.
In the early 1990's, in the quest for greater efficiency, manufacturers
also sought to identify processes such as design studios (concept phase),
project management (detail design and drafting), mold making (tooling phase),
model makers (prototype production) and machine shops (production phase), that
could be 'out-sourced' or carried out by smaller companies specializing in each
phase. This out-sourcing has increased the number of companies dedicated to
these processes and this in turn has further fueled the growth of the lower cost
CAD/CAM market. CAD technology, which formerly covered the detail design area,
now also includes surface modeling, solid modeling and the more complex
requirements of conceptual design and prototyping.
Many CAM users have also invested in CNC (Computerized Numeric Control)
machine tools, which provide the benefits of higher accuracy and a greater
flexibility in machine tool operations and manning. CNC machine tools require
extensive programming. CAM software provides the ability to convert design
drawings or prototype models into numeric data for the tool to follow. In
addition, reverse engineering technologies convert model data generated by laser
scanners and touch probes to mathematical and computer visualized forms.
CAD/CAM technologies have become both more advanced and more affordable to
the small design and manufacturing organizations due to the parabolic increase
in and lower cost of personal computing power in recent years. These
organizations produce molds and dies that form the Company's core market. The
Company has also developed highly specialized solutions for vertical markets
such as plastic injection molding and the production of progressive dies that
can achieve higher productivity than the more generic CAD/CAM systems.
13
P-->

Strategic Direction of the Company. In order to retain a competitive edge
the Company has maintained both CAD and CAM expertise, sought out specialist
sectors requiring 3D solutions, and made those software solutions available for
PC platforms. As a result, the Company is in a strong position to serve those
mold and die manufacturers that have moved towards the use of CAD/CAM
technologies. These strategies have been a significant factor in the Company's
continued growth.
The Company has also built specific software products for the mold and die
making sector (itself subsets of the mechanical engineering sector). The
Company is presently one of only a limited number of CAD/CAM suppliers operating
within this niche market.
The increasing power of PCs has made it possible to perform complex
geometrical and design computations and to stimulate machining operations. The
increased sales of CNC machine tools together with, in the Company's opinion, an
increase in the outsourcing of manufacturing, has lead to an increasing demand
for CAD/CAM products. This can be seen particularly among small and medium-sized
sub-contractors, mold makers, project design offices and machine shops.
The Company maintains and services its software products through regular
issues of upgrades and software maintenance agreements. In the technical
software environment, the Company stresses the importance of support and
consultancy in winning and retaining customers. Accordingly the Company and its
representatives have established more than sixty (60) Competence Centers, which
have dedicated help lines, training centers and support staff to advise on
CAD/CAM specification and implementation. All the technical support for both the
Company's offices and Competence Centers are linked via Internet E-mail and
provide facilities for the exchange of data and customer feedback reports.
The Company's products are designed and specified by engineers who attempt
to incorporate in their designs the feedback received from the Competence
Center's own marketing units. Development is shared between the Company's UK and
Italian based facilities with mathematicians, software engineers, electronic
engineers and mechanical engineers operating in teams to produce and maintain
individual projects. New products evolve as a direct result of client
requirements and feedback, new geometry techniques, enabling technologies and
progress in computing power.
PRODUCTS. The Company sells two product lines. A series of modular software products
under the registered trade name of VISI-Series. This proprietary collection of
software modules features a common geometrical or design base, which can be
configured to provide different software configurations to match customer needs.
The Company also sells the newly acquired Machining Strategist product to
provide shop floor based 3D CAM solutions.
Much of the Company's success is due to its strategic and technological
choices, which include the incorporation of both surface modeling and solid
modeling, the use of C++ programming language and adoption of the Windows TM
based operating systems. Currently, the Company's products are designed to run
on all versions of the popular Windows TM operating systems, making complex
CAD/CAM technologies available to a wider audience.
14
P-->

With VISI-Series and Machining Strategist the Company aims to:
- Present an easily understandable, yet intuitive interface.
- Build specific and productive CAD/CAM solutions on a common base for niche
markets.
- Provide a complete means of transmitting numerical shape data across
CAD/CAM and other system technology interfaces.
- Provide modular packages with a common interface and a common database to
cover a broad range of machining and scanning technologies, that are useful
to the mold & die sector.
- Maintain the process advantage by increasing integration between CAD/CAM
and other allied technologies.
- Provide an open platform environment for third-party development of
complementary solutions.
- Maintain a competitive edge by experimenting and incorporating new
technologies, as they become practicable.
- Offer an automated approach to defining 3D machining programs on the shop
floor
The software products that make up the two product lines contain a context
sensitive on-line help facility. Products are available in many languages
including English, Italian, German, Spanish, French, Japanese, Mandarin, Korean,
Czech, Bulgarian and Turkish.
Software products are supplied as a standard package including technical
manuals, guides and the software itself on a CD-ROM. The Company's software
products and documentation are provided under license agreements with the
customers, which seek to secure protection of the code and other intellectual
property. Use of the Company's software products is accessed by the provision of
a password associated with the end-user's security key. The Company's
VISI-Series trademarks are registered in the UK, USA, Canada, Italy and Japan
and registration has been applied for all countries included within the Madrid
protocol.
The Company provides a software maintenance service for its products, gives
technical support, software upgrades and consultation service to customers. As a
result of the Company's dedication to service and commitment to development of
cutting edge technology, it has relationships with some of its customers that
have extended through three generations of software products.
PRINCIPAL MARKETS. The Company sells directly to end users in the areas surrounding the
Company offices in Turin, Milan, Venice and Rome in Italy, in England, Michigan
in the U.S.A, Toronto in Canada, and Lyons and Lille in France. Direct sales
provide substantial user feedback on product ideas and improvements. Direct
sales represented fifty one percent (51%) of sales in 2002, compared to fifty
percent (50%) of sales in 2001. The increase in direct sales is due to the
expansion of the direct sales force in the U.S.A, Canada, France, Italy and the
acquisition of the Machining Strategist product in the UK.
The majority of indirect sales come through fifty-nine (59) re-sellers
operating in thirty-eight (38) countries. Many of these are classified by the
Company as Competence Centers that provide all pre-sale consultations, technical
support, maintenance, customization and configuration services. Most Competence
Centers sell the Company's products only,
15
P-->

although some sell hardware or compatible solutions for other sectors.
Some of the smaller markets such as Malaysia, Turkey or Chile are typically
run by a single Competence Center with a few staff who operate a network of
agents or promotional partners to cover the territory. They provide all local
technical services and are visited and invited for up-date training at suitable
points in every year.
Below is a breakdown of the Company's total revenue by geographic market
for the last three (3) calendar years.
[Download Table]
DECEMBER 31,
2002 2001 2000
Net revenues
Italy $ 4,520 $ 4,120 $ 3,584
United Kingdom 4,447 4,007 4,045
United States 2,095 950 609
Rest of World 215 231 205
--- ----- -----
Consolidated net revenues $ 11,277 $ 9,308 $ 8,443
======= ===== =====
Sales by geographic region reported in the table above are based on the location
of the invoicing company. Sales from the United Kingdom include sales to the
following geographic regions:
Europe $2,892,000, $2,720,000, and $2,388,000 in 2002, 2001 and 2000
respectively. Asia $1,401,000, $1,213,000 and $1,548,000 in 2002, 2001 and 2000
respectively. North America $72,000, $0,and $0 in 2002, 2001 and 2000
respectively and Rest of the World $82,000, $74,000 and $109,000 in 2002,2001
and 2000 respectively .
Sales from the USA include sales to the following geographic regions: North
America $2,050,000, $909,000 and $536,000 in 2002,2001 and 2000 respectively and
Rest of the World $61,000,$41,000 and $73,000 in 2002,2001 and 2000
respectively.
The Company's sales fluctuate throughout the quarterly operating periods as
a result of variable factors such as seasonal customer demand and timing of
software releases. Seasonality may be influenced by a number of factors. In
Europe, the third calendar quarter is generally weaker than the others because
of well recognized summer vacation periods in July and August. Also the fourth
quarter is traditionally the strongest because many mold and die companies buy
capital goods products at the end of their financial or budget years which are
predominantly calendar year oriented. In some countries particularly in Asia
where more customers purchase upgrades in preference to maintenance agreements,
sales are stronger following the issue of a new software release. During the
second quarter 2002, revenues were adversely affected by world events, with some
business being deferred to the fourth quarter.
Seasonality for revenues has been as follows for the 2002 quarters (as a % of
--------------------------------------------------------------------------------
annual revenue):
-----------------
Year 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
---- ------------ ------------ ----------- -----------
2002 21% 21% 15% 43%
MARKETING.
16
P-->

The Company employs a broad series of marketing activities to promote its
products and develop name recognition and visibility. The Company uses print and
online advertising, online promotions, and regional marketing development in an
effort to further penetrate the tooling segment of the CAD/CAM market. In
addition to online promotions, the Company uses the Internet as a marketing tool
that increases its visibility in the market place, offers downloadable product
demonstrations and facilitates communication between the Company and its
clients. The Company also employs three distinct marketing strategies to
strengthen its position in the market place. The Company's three marketing
strategies are as follows:
Product Strategy: For the past four years the Company has focused the
VISI-Series products as specialist CAD/CAM software for the niche "mold and die"
sector. Providing specialist solutions for a single sector has enabled the
Company to position itself as a potential reference point for this niche market
sector and has added significantly to its customers' productivity. By adding and
building-in the knowledge of a specific design or manufacturing process, the
resulting software is substantially more productive in achieving results
compared to even third generation CAD systems.
Internet Strategy: The Company believes that by adopting a number of
measures to more forcefully adapt its business to the Internet it could increase
margins, gain competitive advantage, and provide valuable customer services.
The Internet is currently used to provide technical support for all dealers
and customers, internal communications and reporting as well as supporting
website information for customers and investors. The Company currently makes
extensive use of the Internet by offering helpdesk and an FTP service for
dealers and an on-line support service, for both Competence Centers and end
users. In addition, upgrades and system improvements are also offered to
customers via the Internet.
The Company is working to provide some downloadable options to its CAD/CAM
product range. At present, the availability of all applications is limited by
the bandwidths available to customers, which restricts the accessibility of
large CAD/CAM applications. Such downloadable options will provide some direct
purchasing possibilities when sufficient bandwidth becomes more widely available
to the Internet Infrastructure
Acquisition Strategy: The Company has developed manufacturing software
(CAM) applications for more than 12 years and attains much of its revenue from
CAM software or applications allied with CAM software. The Company believes that
the CAM market is highly fragmental with approximately 50 competing suppliers.
Some of these suppliers operate in a single geographic market or manufacturing
segment. Some have failed to adopt the latest solid modeling and three
dimensional technologies and others have falling sales. For these reasons the
Company believes the CAM market may be ready to consolidate in much the same way
as the CAD market has reduced the number of global suppliers from around thirty
to ten over the last decade.
The Company believes that by combining the right CAM and/or component
technology companies with sector based products or interlocking geographic
distribution it could become a larger broad based CAM company that provides a
greater range of applications to a wider geographic area.
To this end the Company made its first such acquisition in purchasing the
Italian
17
P-->

company Vero Tecnologie S.p.A in 2000 to attain its component technology for the
manufacture of progressive die. This acquisition broadened the Company's
manufacturing offering as well as strengthening sales and distribution of its
products in the Milan area of Italy.
On March 2nd, 2001 Ubiquity Software Corporation Ltd a UK company sold the
assets of its Electronic Data Interchange (EDI) division to Vero International
Software UK Ltd, a UK subsidiary of the Company ("VERO UK")(See Item 4A for a
description of this acquisition).
On July 1, 2002, the company's U.S. subsidiary, Vero International, Inc.
acquired the Company's Canadian distributor. (See Item 4A for a description of
this acquisition).
On September 28th, 2002 NC Graphics (Cambridge) Ltd a UK company sold its
Machining Strategist 3D CAM to VI Group plc (See Item 4A for a description of
this acquisition).
PATENTS, LICENSES AND/OR CONTRACTS. The Company seeks to protect the proprietary rights to its software through
contract provisions, license agreements and the registration of trademarks. The
Company sells a series of modular software products under the registered trade
name VISI-Series. The Company's trademarks are registered in the UK, USA,
Canada, Italy and Japan and the Company has applied for registration in all
member states countries of the Madrid protocol.
The Company's software products and documentation are provided under
license agreements that provide for the protection of all intellectual property.
The use of the Company's software is accessed by the provision of a password
associated with the end-user's security key. The Company generally enters into
confidentiality or license agreements with its employees, resellers, customers,
consultants, and corporate partners, and generally controls access to and
distribution of its software, documentation and other proprietary information.
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information the Company regards as proprietary. Although the Company
utilizes software security devices and/or key codes to prevent unauthorized use
or copying of its products, preventing unauthorized use of software is
difficult. There can be no assurance that the steps taken by the Company will
prevent misappropriation of its technology, particularly in foreign countries
where the laws may not protect the Company's proprietary rights as fully as do
the laws of the United States and the United Kingdom. (See, Risk Factors, Item
3.D). COMPETITION.
The CAD/CAM software industry, characterized by rapid advances in
technology and evolving customer requirements, is highly competitive. The
Company faces competition from numerous companies in all of its products. Also,
some of the Company's competitors are larger and more established, benefit from
greater market recognition and have greater financial, production and marketing
resources than the Company. The Company believes that due to the increasingly
larger number of companies that operate in this market, it has no major single
competitor or group of competitors. The principle factors permitting the
Company's products to compete successfully against its competitors' products
are: (i) the compatibility of the Company's products with other software
applications and existing and
18
P-->

emerging industry standards; (ii) the Company's ongoing product development;
(iii) the offering of innovative products that incorporate both surface modeling
and solid modeling, use the C++ programming language and adopt the Windows TM
operating system; (iv) the level and breath of the Company's technological
integration; (v) the technical expertise and support provided by the Company
through its Competence Centers; (vi) the reputation of the Company among its
providers as well as customers; and, (vii) the cost-efficient pricing of
ownership of the Company's products coupled with the products' high-end
capabilities.
MATERIAL EFFECTS OF GOVERNMENT REGULATIONS. None.
C. Organizational structure.
------------------------
SUBSIDIARIES.
As of December 31st 2002 the Company had the following subsidiaries all of
which are engaged in the development, marketing and distribution of the
Company's products:
[Download Table]
Percentage Country of
ownership incorporation
---------- --------------
Vero International Software S.r.l. 100% Italy
Vero International Software UK Limited 100% United Kingdom
Vero International, Inc. 100% USA
*Vero Sistemi e Consulenze S.r.l. 100% Italy
**Vero Tooling Solutions, Inc. 100% Canada
Vero Tecnologie S.p.A. 100% Italy
<FN>
*Wholly-owned subsidiary of Vero International Software S.r.l.
** Wholly-owned subsidiary of Vero International Inc.
Subsequent to the year end the Company formed a new, wholly owned subsidiary in
Tokyo, Japan and reorganized the three Italian subsidiaries into one wholly
owned corporation Vero International Software S.p.A.
All commercial activities of the Company are organized and controlled from
the Company's office in Gloucestershire in England.
The company has a nine percent (9%) equity interest in Visisoft S.R.O., a
company incorporated in the Czech Republic. The Company does not exercise any
control over the activities of Visisoft S.R.O.
While all of the subsidiaries are engaged in the principal business of the
Company thefollowing narrative provides details of the main focus of each
subsidiary's activities.
Vero International Software S.p.A now has offices at Via Prelle 30, 10090
Romano Canavese, (To) Italy, Villagio della Cooperazione, 20, 30020 Marcon (Ve),
Via Maestri del Lavoro, 29, 20025 Legnano (MI) and via Madonna del Carmine 5,
03023 Ceccano (Fr). Principle functions are both direct and indirect sales
activities for the Italian market and product development, serving as the main
development center for the Company.
19
P-->

development and administration
Marcon, Ve, Office of Vero International Software, S.p.A. Leased $ 9,745 2004
Italy
Activities include sales and marketing,
and technical support
Milan, Italy Office of Vero International Software, S.p.A Leased $ 22,740 2013
Activities include sales and marketing
technical support,
development and administration
Bingham Offices of Vero International, Inc. Leased $ 43,282 2005
Farms,
Michigan,
U.S.A
Activities include sales and marketing,
and technical support
Burlington, Office of Vero Tooling Solutions, Inc. Leased $ 19,920 2005
On,Canada Activities include sales and marketing,
and technical support
Tokyo, Japan Principal offices of Vero Japan kkActivities Leased 49,800 2005
include sales and marketing,
and technical support
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.
The purpose of this section is to provide management's explanation of
factors that have affected the Company's financial condition and results of
operations for the historical periods covered by the consolidated financial
statements attached hereto, and management's assessment of factors and trends
which are anticipated to have a material effect on the Company's financial
condition and results of the operations in future periods.
Introduction
------------
During 1997 Vero International Software S.r.l ("Vero"), which at the time
was a privately owned company and principal holding company for the Group, began
a reorganization in preparation for a public offering and listing on the
Alternative Investment Market of the London Stock Exchange ("AIM"). Vero was
acquired at the beginning of 1998 by VI Group plc, being a newly formed U.K
company for the purpose of the reorganization. At that time both VI Group plc
and Vero were owned and controlled by the same parties. VI Group plc raised $4.0
million in April of 1998. The reorganization continued with the move of the
Company's headquarters from Italy to Stroud in Gloucestershire, England in 1998.
At the end of 1998 the Company decided to run all commercial operations outside
of Italy from the new Company headquarters and, as a result, the Belgian branch
closed early in March 1999, a new company was appointed as a distributor for the
Benelux region.
21
P-->

YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
NET REVENUES. Product revenues include the sale of software licenses and
associated hardware. Service revenues are principally revenues in respect of
software maintenance fees and include training revenues and consultancy fees.
Product revenues increased by $0.8 million to $8.6 million in 2002, compared to
the $7.8 million for 2001, an increase of 10%. Service revenues increased by
$1.1 million to $2.7 million in 2002 compared to $1.5 million for 2001, an
increase of 74%. The increase in service revenues follows a trend of an
increasing number of customers renewing maintenance contracts, although the
acquisition of the Machining Strategist product line also had the effect of
increasing service revenues by $0.04 million, representing 4% of the increase.
Overall, net revenues increased by $2.0 million to $11.3 million in 2002
compared to the $9.3 million for 2001, an increase of 21%. However, the weaker
US dollar against pounds sterling and the Euro, by comparison to 2001 had the
effect of increasing the growth rate when revenues are expressed in US dollars.
Had exchange rates been similar to those in 2001 revenue growth would have been
closer to 17%
Net revenues arising from subsidiaries operating in Italy increased $0.4
million to $4.5 million compared with $4.1 million in 2001, an increase of 10%.
Net revenues from the subsidiary operating in the United Kingdom increased $0.4
million to $4.4 million compared with $4 million in 2001, an increase of 10%.
Net revenues arising from the subsidiary in the United States increased $1.1
million to $2.1 million compared to $0.95 million in 2001, an increase of 45%.
Growth in product revenues was substantially in respect of increases in
sales through direct sales channels. The average configuration price remained
the same as 2002. While the Company continually updates its software range and
improves functionality with each new release, the extent of revenues generated
during both 2002 and 2001 from identifiable new modules or products amounted to
less than 10% of total product revenues. There were no new types of service
provided.
There were no third party revenues generated by the holding company.
COST OF REVENUES. Cost of product revenues include license fees for third
party software licenses, software media costs and a relatively small amount for
computer hardware. Cost of product revenues for 2002 remained close to the 18%
of product revenues recorded in 2001
Cost of service revenues are principally the compensation cost of employees
providing maintenance support and consultancy services provided following a sale
of software to a customer and as such are considered to be a cost of sales,
rather than a selling cost. Cost of service revenues for 2002 were 33% of
service revenues compared to 39% for
25
P-->

2001. The reduction of the cost of service revenues in relation to service
revenues is mainly due to efficiencies in staffing the increased revenue stream.
SELLING EXPENSES. Selling expenses consist of costs associated with the
promotion, advertising, trade shows, travel costs and compensation of personnel
involved in selling and marketing of products and pre sales technical support
activities. Such costs increased by $1.5 million to $4.4 million in 2002
compared to $3 million for 2001, an increase of 51%. A full year of the cost of
additional staff in the Detroit office, the branch offices in France, the
acquisition of Vero Tooling Solutions, Inc. and Machining Strategist
contributed to the increase.
GENERAL AND ADMINISTRATION. General and administration costs include the
Company's group management, finance, legal and facilities costs. Such costs
increased by $0.8 million in 2002 at $2.7 million compared to $1.9 million in
2001, an increase of 42%. The increase in cost was due to a number of factors
including the additional facility costs of the new offices in Detroit, the
branch offices in France and the offices associated with the acquisitions of
Vero Tooling Solutions, Inc. and the Machining Strategist business.
PRODUCT DEVELOPMENT. Product development consists principally of
compensation for product developers and associated costs incurred, together with
the cost of any development activities carried out for the Company by third
parties. Such costs increased by $179,000 to $1.4 million. This small net
increase fails to reflect an underlying growth of about 37% ($0.67 million)
after excluding the effects of the Eureka development grant awarded to Vero
International Software Srl in Italy on the 17th of December 2002. The Eureka
project commenced in July 2001 and is scheduled to continue until the end of
December 2003. Accordingly the Company recognized $0.68 million due to the
Eureka grant and other Italian grant awards as development cost savings in the
2002 accounts,
The Company believes that ongoing product development is necessary to
maintain and enhance the Company's competitive position and thereby assist with
future revenue growth. In any particular period the increase in product
development costs may not directly relate to increases in revenue, as the
additional revenues generated would normally expect to follow the release of new
or enhanced products.
EARNINGS BEFORE INTEREST TAX DEPRECIATION AND AMORTIZATION ('EBITDA'). The
EBITDA measure of earnings was reduced to $0.8million in 2002 compared to $1.5
million in 2001 as the Company invested further in sales offices and product
development.
DEPRECIATION. Depreciation costs relate largely to capital equipment items
such as computer hardware, telecommunications systems, software tools and
Company cars. Depreciation in 2002 rose by $58,000 to $292,000 as a result of
equipping new offices and personnel.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLE ASSETS. Amortization charges
relate largely to capitalized purchased software products and goodwill arising
from acquisition.
Amortization charges in 2002 fell by $105,000 largely due to the adoption of the
SFAS No. 142 "Goodwill and other Intangible Assets". Under the provisions of
this accounting standard certain intangible assets which were previously being
amortized will instead be
26
P-->

tested annually for impairment.
INCOME TAX. The effective income tax rate for the Company was 120% compared
to 41% for 2001 and 54% in 2000. The rate of taxation is influenced by the tax
rate applicable to the various locations in which the Company operates. The rate
was higher due to the relative impact of Italian taxes relating to the Eureka
grant and some other taxes that were not directly related to the earnings of the
Italian subsidiaries.
NET INCOME. Net income decreased by $0.7 million in 2002 to a loss of
$74,000, compared to a profit of $0.6 million in 2001. The decrease largely
represents the additional investments made by the Company in expanding sales and
product development that are expected to provide returns later than 2002.
The net (loss)/income of the holding company was $0.6 million, compared to
a profit of $0.1million in 2001.
Income from operations arising from subsidiaries operating in the European
Union decreased by $0.27 million to $0.33 million in 2002 compared to $0.6
million in 2001. In the United States, income from operations decreased by $0.3
million to $0.1 million from $0.4m in 2001. The decrease is principally due to
the increase in costs due to the Company's expansion not being matched by a
similar increase in revenues over the same period.
CASH FLOW. Cash flow from operating activities was an outflow of $1.1
million for 2002 compared to an outflow of $0.2 million for 2001. This change
was principally due to an increase in the level of trade debtors and other
debtors at December 31, 2001, compared to 2001. The increase in trade debtors
arises from both an increase in the level of revenues and from the timing of
revenues being weighted towards the year end.
Cash outflow from investing activities increased by $2.6 million to $3.3
million in 2002 compared to $0.7 million in 2001. Additions to property, plant
and equipment increased to $0.7 million compared to $0.3 million in 2001. During
2002 the Company acquired the Machining Strategist business for which cash
consideration of $1.5 million was paid in 2002. Total payments in respect of
acquisitions amounted to $2.6 million in 2002 compared to $ 0.4 million in 2001.
Cash flow from financing activities was an inflow of $4.9 million in 2002,
compared to $0.5 million in 2001. During 2002, the Company sold additional
shares to institutional shareholders for a value of $4.8 million and reduced
short term bank borrowings by $0.2 million and increased capital lease
repayments by $0.2 million.
The net result was an increase in cash and cash equivalents of $0.6 million
in 2002 compared to a decrease in cash and cash equivalents of $0.4 million in
2001. Cash and cash equivalents at the end of 2002 were $1.9 million, compared
to $0.7 million at the end of 2001.
27
P-->

YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR ENDED DECEMBER 31, 2000
NET REVENUES. Product revenues include the sale of software licenses and
associated hardware. Service revenues are principally revenues in respect of
software maintenance fees and include training revenues and consultancy fees.
Product revenues increased by $0.5 million to $7.8 million in 2001, compared to
the $7.3 million for 2000, an increase of 7%. Service revenues increased by
$0.36 million to $1.5 million in 2001 compared to $1.2 million for 2000, an
increase of 30%. The increase in service revenues follows a trend of an
increasing number of customers renewing maintenance contracts, although the
acquisition of the EDI division also had the effect of increasing service
revenues by $0.2 million, representing 60% of the increase.
Overall, net revenues increased by $0.9 million to $9.3 million in 2001
compared to the $8.4 million for 2000, an increase of 11%. However, the stronger
US dollar against pounds sterling and the Euro, by comparison to 2000, had the
effect of reducing the growth rate when revenues are expressed in US dollars.
Had exchange rates been similar to those in 2000, revenue growth would have been
closer to 17%.
Net revenues arising from subsidiaries operating in Italy increased $0.5
million to $4.1 million compared with $3.6 million in 2000, an increase of 15%.
Net revenues from the subsidiary operating in the United Kingdom remained the
same as 2000 at $4.0 million. Net revenues arising from the subsidiary in the
United States increased $0.35 million to $0.95 million compared to $0.6 million
in 2000, an increase of 56%.
Growth in product revenues was substantially in respect of increases in
sales through direct sales channels. The average configuration price remained
the same as 2001. While the Company continually updates its software range and
improve functionality with each new release, the extent of revenues generated
during both 2001 and 2000 from identifiable new modules or products amounted to
less than 5% of total product revenues. There were no new services.
There were no third party revenues generated by the holding company.
COST OF REVENUES. Cost of product revenues includes license fees for third
party software licenses, software media costs and a relatively small amount for
computer hardware. Cost of product revenues for 2001 were 18% of product
revenues compared to 19% in 2000. The decrease is primarily due to the
acquisition of Vero Tecnologie (formerly Tecnocam S.p.A) in May 2000, as license
fees paid to Tecnocam, following acquisition, were eliminated on consolidation
for a full year in 2001 , whereas such costs would have been treated as third
party license fees for the first five months in 2000.
Cost of service revenues are principally the compensation cost of employees
providing maintenance support and consultancy services provided following a sale
of software to a customer and as such are considered to be a cost of sales,
rather than a selling
28
P-->

cost. Cost of service revenues for 2001 were 39% of service revenues compared to
37% for 2000.
SELLING EXPENSES. Selling expenses consist of costs associated with the
promotion, advertising, trade shows, travel costs and compensation of personnel
involved in selling and marketing of products and pre sales technical support
activities. Such costs increased by $0.3 million to $3.0 million in 2001
compared to $2.7 million for 2000, an increase of 13%. A full year of the cost
of Vero Tecnologie and the acquisition of the EDI division contributed to the
increase.
GENERAL AND ADMINISTRATION. General and administration costs include the
Company's group management, finance, legal and facilities costs and amortization
of goodwill. Such costs increased by $0.4 million in 2001 at $2.0 million
compared to $1.6 million in 2000. The increase in cost was due to a number of
factors including an increase in the amortization of goodwill and a full year of
Vero Tecnologie.
PRODUCT DEVELOPMENT. Product development consists principally of
compensation for product developers and associated costs incurred, together with
the cost of development activities carried out for the Company by third parties.
Such costs decreased by $0.1 million to $1.5 million, compared to $1.6 million
in 2000. The decrease is due to a favorable effect of exchange rate when
development costs are stated in US dollars, which more than offsets the effect
of a full year of development costs relating to Vero Tecnologie.
The Company believes that ongoing product development is necessary to
maintain and enhance the Company's competitive position and thereby assist with
future revenue growth. In any particular period the increase in product
development costs may not directly relate to increases in revenue, as the
additional revenues generated would normally expect to follow the release of new
or enhanced products.
INCOME TAX. The effective income tax rate for the Company was 41% for 2001
and 54% in 2000. The rate of taxation is influenced by the tax rate applicable
to the various locations in which the Company operates. The rate was lower in
2001 principally due to profits arising in the United States, which were offset
by tax losses from previous periods.
NET INCOME. Net income increased by $0.24 million in 2001 to $0.6 million,
compared to $ 0.4 million in 2000, an increase of 50%. The increase is due
mainly to the gross profit increasing by more than the operating expenses,
together with the effect of a lower tax rate.
The net income of the holding company was $52,000, compared to $92,000 in
2000.
Income from operations arising from subsidiaries operating in the European
Union decreased by $0.1 million to $0.6 million in 2001 compared to $0.7 million
in 2000. In the United States, income from operations increased to $0.4 million
from a break-even position in 2000. The increase is principally due to strong
revenue growth that exceeded increases in operating costs.
CASH FLOW. Cash flow from operating activities was an outflow of $0.2
million for 2001 compared to an inflow of $0.3 million for 2000. This change was
principally due to an increase in the level of trade debtors and other debtors
at December 31, 2001, compared to
29
P-->

2000. The increase in trade debtors arises from both an increase in the level of
revenues and from the timing of revenues being weighted towards the year end.
Cash outflow from investing activities increased by $0.3 million to $0.7
million in 2001 compared to $0.4 million in 2000. Additions to property, plants
and equipment increased to $0.3 million compared to $0.1 million in 2000. During
2001 the Company acquired the EDI division for which consideration of $0.3
million was paid in 2001, together with the balance of payments in respect of
Vero Tecnologie. In total payments in respect of acquisitions amounted to $0.4
million in 2001 compared to $ 0.3 million in 2000.
Cash flow from financing activities was an inflow of $0.5 million in 2001,
compared to no change during 2000. During 2001, the Company issued new share
capital to Baronsmead Venture Capital Trust for $0.4 million and increased short
term bank borrowings by $0.2 million.
The net result was a decrease in cash and cash equivalents of $0.4 million
in 2001 to cash and cash equivalents of $0.7 million at the end of 2001,
compared to $1.1 million at the beginning of the year.
B. Liquidity and Capital Resources.
-------------------------------
The Company has financed its operations primarily through cash generated
from operations, utilization of bank facilities and from the sales of equity
during the flotation in April 1998 and subsequent placements. The effect of
operations and investments on cash flows is described in section A. above.
The Company's Italian subsidiary Vero International Software S.p.A. has
mortgage notes which are secured by the Company's property in Romano Canavese,
near Turin, Italy. The balance outstanding at December 31, 2002 was $34,000
owed to an Italian bank. Interest rates are variable and were between 8.5% and
7.25% per annum.
In addition to mortgage loans, the Company has bank facilities available to
its subsidiaries. The Italian subsidiary has facilities of up to $0.74 million
dollars, from a combination of three separate banks, available at between 1% to
3% above the bank base rate. The UK subsidiary has a multi-currency facility of
up to $0.8 million secured on qualifying trade debtors when outstanding at an
interest rate of 1.5% above the UK bank base rate. On December 31, 2002, the
amount borrowed under such facilities was $0.74 million.
On May 7, 2002, the Company successfully completed a placing in the United
Kingdom of 14,651,166 ordinary shares of 0.5 pence, raising $4.6 million before
expenses.
On January 10th 2003, the Company completed a loan and investment agreement with
Hemisphere Capital, LLC for a debenture $1.0 million convertible into American
Depositary Receipts ("ADRs") and agreed upon the terms for possible future
acquisition finance of between $2.0 million and $4.0 million by the sale to
Hemisphere of preference shares. The preference share financing are subject to
the approval of the Company's shareholders. A description of the Hemisphere
financing is contained in section 10C of this Report.
The Company believes that the cash balances, bank facilities and cash being
generated from operations will be sufficient to meet the Company's current cash
requirements for working
30
P-->

capital and capital expenditures for at least the next twelve months.
The level of borrowing and cash balances fluctuates throughout the year and
follows the pattern of business principally affected by the collection of
accounts receivable, settlement of operating expenses and payment of taxes.
There are no material restrictions on the ability of the subsidiary
companies to pay dividends other than the fact that the companies need to have
sufficient profits available for distribution and that sufficient working
capital be maintained.
The treasury objectives of the Company are principally to ensure that
sufficient finance is available to meet the operating requirements of the
Company and its subsidiaries; that funds are held in the appropriate currencies
to match obligations to creditors and balance the level of monetary assets and
liabilities within each subsidiary, and that consideration is given to the post
tax cost of borrowing or investing in currency deposits across the range of
countries in which the Company operates. Treasury activities are monitored and
controlled from the Company's UK headquarter to ensure a co-ordinated and
consistent approach to treasury management.
C. Research and Development
--------------------------
The Company relies heavily on the sale of its proprietary software products
and as such the software needs to be continually updated to maintain a
competitive edge and to incorporate user suggestions. The Company has had two
development groups since early 1998.
The research group provides research and information on emerging
technologies and software component libraries. This unit also performs early
feasibility, development or integration work for these emerging technologies.
The development group maintains existing releases of the commercialized
products and develops future releases incorporating new features, additional
modules and new applications for the products.
The Company's policy is not to capitalize its research and development
expenses but to expend them on an "as incurred" basis. The Company also
purchases software to incorporate into its products. Those software purchases
normally occur when the software element can be configured as a "plug-in"
library to the proprietary products and when it is a cost-effective alternative
to developing the component software in-house. Purchased software is capitalized
and amortized over its estimated useful life.
The Company normally provides at least one major new release per year of its
existing product line and has issued four releases in the last three years.
Expenditure on product development over the last three years has been
$1,439,000, $1,260,000, and $1,563,000 for the years ending December 31, 2002,
2001, and 2000 respectively.
D. Trend Information
-----------------
The Company's revenue has grown on average by 13% per year over the last
five years with positive growth in each year. There was a 21% increase in the
year ending on
31
P-->

December 31, 2002, 10% in the year ending on December 31, 2001 and 15% in the
year ending on December 31, 2000. The growth rate for the year ending on
December 31, 2002 would have been 11% if exchange rates had remained similar to
2001, and the growth rate for the year ending on December 31, 2001 would have
been 17% if exchange rates had remained similar to 2000.
The Company's revenues are also affected by significant seasonal trends
with the third quarter typically being the weakest and the fourth quarter being
the strongest. These seasonal trends are triggered because European revenues
fall during the month of August when many French, German and Italian engineering
companies close for a two or three week break. Similarly, revenues are higher in
the last two months of the year when customers analyze the current year's budget
expenditures or profits. Since many European companies have year-ends that
coincide with the calendar year, these year-end calculations give rise to
additional ordering in the final weeks of the year.
E. OFF-BALANCE SHEET ARRANGEMENTS NONE F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
[Enlarge/Download Table]
Payments due by period
Total Less than 1-3 years 3-5 years More than
1 year 5 years
Gross Long-term Debt Obligations $ 35 35 - - -
Interest payable $ (1) (1)
--- ---
Net long term debt obligation $ 34 34
--- ---
Gross Capital Lease Obligations $ 342 103 179 60 -
Interest payable $ (31) (14) (15) (2)
---- ---- ---- ---
Net Capital Lease Obligations $ 311 89 164 58
--- -- --- ---
Operating Lease Obligations $ 995 340 461 160 34
Purchase Obligations $ 80 80 - - -
G. APPLICATION OF CRITICAL ACCOUNTING POLICIES The company regards the following as its critical accounting policies:
REVENUE RECOGNITION The Company derives revenues principally from two sources, customer license
fees on its software products and service fees.
32
P-->

The Company recognizes revenue based on the provisions of Statement of
Position ("SOP") 97-2, "Software Revenue Recognition". As no significant
modification to the Company's software products is required, software license
revenues are recognized upon persuasive evidence of an arrangement, delivery and
acceptance of the software, and when collection of a fixed or determinable
license fee is considered probable. Agreements may provide the customers the
right to multiple copies in exchange for guaranteed amounts, only if copies are
requested by the customer. The license fee is payable even if no additional
copies are requested by the customer. Revenue is recognized at the delivery of
the product master or the first copy and the estimated costs of duplication,
incidental to the arrangement, are accrued.
Service revenues consist of fees from maintenance and technical support
agreements and consulting or training arrangements. Maintenance revenue, when
bundled with the sale of software licenses, is recognized together with the
initial licensing fee on delivery of the software as (a) the maintenance fee is
included with the initial licensing fee, (b) maintenance included with the
initial license is for one year or less, (c) the estimated cost of providing
maintenance during the arrangement is insignificant, and (d) unspecified
upgrades/enhancements offered during the maintenance arrangement historically
have been and are expected to continue to be minimal and infrequent. All
estimated costs of providing the services, including upgrades/enhancements are
accrued. Maintenance revenue under separate arrangements is deferred and
recognized on a straight-line basis over the term of the agreement; amounts
received in advance of revenue recognition are classified as deferred revenue.
Maintenance agreements provide for technical support and periodic unspecified
product upgrades. Revenues from consulting services or training are measured by
the relationship of hours incurred and estimated total hours of the contract or
training course. Revisions in estimated hours are reflected in the accounting
period in which the required revisions become known.
The Company sells software licenses to distributors at a predetermined
price. Distributors are responsible for supplying maintenance and customer
support to the end customer. The Company may provide maintenance and customer
support to the distributors. Revenues on these sales are recognized in the same
manner as all other software license and maintenance sales. These sales are not
generally contingent upon the distributors' resale of the software.
The Company is generally not contractually obligated to accept returns,
except for defective, shelf-worn and damaged products in accordance with
negotiated terms. In accordance with SFAS No. 48, "Revenue Recognition when
Right of Return Exists", revenue is recorded net of an allowance for estimated
returns, exchanges, markdowns, price concessions, and warranty costs. Such
reserves are based upon management's evaluation of historical experience,
current industry trends and estimated costs. The amount of reserves ultimately
required could differ materially in the near term from the amounts included in
the accompanying consolidated financial statements.
F. Recent Accounting Pronouncements
--------------------------------
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and other
Intangible Assets". Under this standard, goodwill is no longer amortized but
reviewed for impairment at least annually. The standard also provides guidance
on the accounting for other intangible assets. An acquired intangible asset
33
P-->

(other than goodwill) with an indefinite useful life should not be amortized
until its useful economic life is determined to be finite. These assets should
be tested for impairment at least annually. An acquired intangible asset (other
than goodwill) with a limited useful life should be amortized over its useful
economic life and reviewed for impairment in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets. If the
provisions of SFAS had been adopted in 2001 and 2000, amortization would have
been reduced by $109,000 in 2001 and $26,000 in 2000.
On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets". This standard supersedes SFAS No.
121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of" but retains the basic requirements regarding when and
how to measure an impairment loss. SFAS No. 144 applies to long-lived assets to
be held or disposed of but specifically excludes certain classes of assets such
as goodwill and intangible not being amortized.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES' COMPENSATION.
A. Directors and Senior Management.
-------------------------------
The Senior Management of the Company is as follows, all of whom are
Directors of the Company except as noted:
Name Age Position with Company
---- --- ---------------------
Stephen Palframan 51 Director and Non-Executive
Chairman
Donald A. Babbs 51 Director and Chief Executive Officer
Gerard O'Driscoll 55 Director and Research and
Development Director
Peter Wharton* 40 Director and Finance Director
Elliot I. Miller 69 Director and Non-Executive Deputy
Chairman
Richard Youhill 39 Director, Sales Director
Ivy Fredericks 44 Non-Executive Director
*Mr. Wharton ceased to be a Director of the Company with effect from February22, 2003.
STEPHEN PALFRAMAN, the Non-Executive Chairman of the Company since January
2000, was formerly Chief Executive of Bristow Helicopter Group Ltd, the world's
largest operator of twin-engined helicopters. He joined Bristow in 1988 as
Finance Director and was instrumental in the 200m management buyout in 1991
from its parent company. As Chief Executive in 1996 he oversaw the subsequent
sale of Bristow to an American group. Prior to Bristow he held senior financial
positions with Northern Engineering Industries plc (now part of Rolls-Royce
plc), Nabisco Brands Inc. and Ingersoll-Rand Inc. He qualified as a Chartered
Management Accountant in 1979.
34
P-->

DONALD A. BABBS, the Chief Executive Officer of the Company since 1988,
started his career as a sales engineer for the British Aerospace Concorde sales
team. He joined British Olivetti in 1980 where he became Software Manager
(CAD/CAM) and ultimately Marketing Manager (CAD/CAM). He took on responsibility
for corporate marketing of engineering workstations and CAD/CAM software for
Olivetti in Italy before establishing the Company in 1988.
GERARD O'DRISCOLL, the Research and Development Director of the Company
since 1988, started his career on a short service commission in the Royal Navy
before joining British Olivetti as a sales engineer (1976-1981) and later
Marketing Manager for CAM systems. After a sojourn at Racal Redac Ltd., he moved
into software consultancy, and was among the first to develop a 2D CAD system.
Ultimately he became Senior Consultant for CAD systems to Olivetti in Italy
before joining the Company at its inception in 1998.
ELLIOT I. MILLER, the Non-Executive Deputy Chairman of the Company since
1997, is an American lawyer who has practiced law in New York and Connecticut
since 1958. He has broad legal experience in corporate, partnership, securities
and tax matters, including equity and debt financing transactions in the USA and
internationally. He has served on the boards of Belgian, Indian and French joint
ventures as well as American Companies. Mr. Miller's responsibilities are
primarily business and legal.
RICHARD YOUHILL, Sales Director of the Company since March 5, 2001. Mr.
Youhill joined the Company as UK Sales Manager in 1993 and has held the position
of Group Sales Manager for the last 3 years. Prior to joining the Company, he
was Sales Manager for a UK based supplier of CAD/CAM software and has over 14
years of UK and international experience in the sales & marketing of CAD/CAM
software. Mr. Youhill's responsibilities are primarily the management and
development of the direct sales personnel and indirect dealer sales channels.
IVY LINDSTROM FREDERICKS, was appointed on May 16, 2002 as a non-executive
director of the Company. She is Managing Director, Corporate Finance at
Westminster Securities Corp. in New York. She has nearly 20 years experience in
the investment banking industry with several firms including Ambient Capital,
KPMG, Kidder Peabody and Drexel Burnham Lambert.
There are no family relationships between any of the Directors or senior
management of the Company.
Stephen Palframan acts as a non-executive director for Janvier Limited a
microwave technology and computer software company and a non-executive director
of Goodall Bates and Todd a fuel distributor and lubricant blending company in
the U.K.
Elliot Miller acts as a non-executive director of Raven Technologies Inc, a
software development company operating in the United States which does not
compete with the Company. Mr. Miller is of counsel to the law firm of Kleban &
Samor, P.C. which is the Company's legal counsel in the United States. Mr.
Miller is not a shareholder of such law firm and receives no compensation based
upon any fees paid to such law firm by the Company.
Ivy Fredericks is an officer in the firm of Westminster Securities Corp.
which has received compensation from the Company for securing financing for the
Company and may
35
P-->

be entitled to additional compensation as described in Section 10C herein
None of the other Directors of the Company currently sit on corporate
boards of other companies.
There are no arrangements or understandings with major shareholders, customers,
suppliers or others, pursuant to which any person referred to above was selected
as a Director or member of senior management.
B. Compensation.
------------
Directors Compensation. The aggregate direct remuneration paid to all
persons, as a group, who served in the capacity of Director or executive officer
during the year that ended December 31, 2002 was approximately $785,000 (2001:
$757,000). This amount includes amounts set aside or accrued to provide pension
retirement or similar benefits but does not include amounts expended by the
Company or made available to such persons as expenses, such as business travel,
professional and business association dues, that are customarily reimbursed to
officers other than independent Directors. English Law does not require the
disclosure of management compensation on an individual basis.
Options to Purchase Securities of the Company. Peter Wharton was granted an
option in 1999, exercisable from October 21, 2001 until October 21, 2008. As of
December 31, 2002 the option consisted of rights to purchase 142,857 shares of
ordinary stock at 21 pence per share. None of these options were exercised and
with Mr. Wharton's resignation from the Company all of these options have now
lapsed.
Richard Youhill was granted an option in 1998, exercisable from April 2,2001 until April 2, 2008. As of May 20, 2003 the option consisted of rights to
purchase 17,000 shares of ordinary stock at 50 pence per share.
Pensions. Contributions were made to a group personal pension plan on a
defined contribution basis on behalf of three directors. The total of such
contributions during the year ended December 31, 2002 was $25,000 (2001:
$20,000).
C. Board Practices
---------------
Pursuant to Article 69 of the Company's Articles of Association, each board
member must be elected at the annual general meeting of shareholders after his
initial appointment. Each year certain of the Directors must offer themselves
for re-election. Current expiration dates for each Director's term are as
follows:
Donald A. Babbs 2003
Elliot I. Miller 2005
Stephen Palframan 2004
Gerard O' Driscoll 2006
Richard Youhill 2007
Ivy Fredericks 2005
Service Contracts with the Directors. - The following is a listing of the
current
36
P-->

service contracts in effect between the Company and its Directors:
DONALD A. BABBS. The Company entered into an Executive Service Contract
with Donald A. Babbs on March 20, 1998.*
GERARD O'DRISCOLL. The Company entered into an Executive Service Contract
with Gerard O'Driscoll on March 20, 1998.*
ELLIOT I. MILLER. The Company entered into a Non-Executive Service Letter
Agreement (the "Letter Agreement"), and a subsequent letter agreement amending
the Letter Agreement, with Elliot I. Miller dated March 20, 1998 and April 20,1998, respectively.
STEPHEN PALFRAMAN. The Company entered into a Non-Executive Service Letter
Agreement with Stephen Palframan dated January 5, 2000.
RICHARD YOUHILL. The Company entered into an Executive Service Agreement
dated March 1, 2001 with Richard Youhill.*
IVY FREDERICKS. The Company entered into a Non-Executive Service Letter
Agreement with Ivy Fredericks dated May 16, 2002
* In the event that the Director terminates his contract, the Company
breaches the contract, there is a takeover or a change of control of the
Company, or the Company fails at a general meeting to re-elect the Director
following the Director's retirement by rotation, a termination payment is
required under the agreement to be paid to the Director that shall equal the
aggregate of: (i) the gross salary payable to the Director for the period
commencing on the termination date and ending on the earliest of twelve (12)
months from the date of termination notice or the Director's sixty-fifth
birthday ("Relevant period");and, (ii) a sum equivalent to the notional value to
the Director of all benefits in-kind that would otherwise have been receivable
by the Director from the Company for the Relevant Period based on their taxable
value for the tax year immediately preceding the tax year in which the
termination occurs and assuming that the value of such benefits in kind to the
Director accrues on a regular monthly basis.
Audit Committee. The Company presently has an Audit Committee comprised of
the following independent Directors:
Elliot I. Miller
Stephen Palframan
Ivy Fredericks
The Audit Committee meets not less than twice a year and is responsible for
among other things:
1. Evaluating the performance of independent auditors and recommending to
the Board of Directors the appointment of the independent auditors and
where appropriate recommending that the Board of Directors replace the
independent auditors.
2. Discussing with the independent auditors the scope of their audit.
3. Discussing with the independent auditors and management the Company's
37
P-->

accounting principles, policies and practices and its reporting and
practices.
4. Reviewing and discussing with the independent auditors and Company
management the Company's audited annual financial statements and the
results of the annual audit.
5. Considering the independent auditors' judgments about the quality and
appropriateness of the Company's accounting principles as applied in
its financial reporting.
6. Discussing with the independent auditors and the Company's Chief
Financial Officer the adequacy of the Company's or any of its
subsidiaries accounting, financial and operational controls.
7. Considering whether the independent auditors' provision of non-audit
services is compatible with maintaining the independent auditors'
independence.
8. As a whole, or through the Audit Committee Chair, reviewing with the
independent auditors the Company's interim financial results included
in Form 6-K prior to filing with the Securities and Exchange
Commission ("SEC").
9. Submitting appropriate reports required by the SEC to the shareowners
in the Company's annual proxy statements and provide appropriate
certification to The American Stock Exchange as required.
10. Ensure that the independent auditors submit periodic reports to the
Audit Committee delineating all relationships between the independent
auditors and the Company, consistent with Independence Standards Board
Standard No. 1; discuss such reports with the independent auditors,
and recommend that the Board of Directors take appropriate action to
satisfy itself of the independence of the independent auditors.
11. Discuss with the independent auditors the matters required to be
discussed by Statement on Auditing Standards No. 61.
Remuneration Committee. A Remuneration Committee has been established and
is comprised of the non-executive Chairman and two Non-executive Directors. The
current members of the Remuneration Committee are Stephen Palframan (Chairman),
Elliot I. Miller and Ivy Fredericks. This committee will review the performance
of the Executive Directors and set the scale and structure of their remuneration
and the basis of their service contracts with due regard to the interests of the
shareholders.
D. Employees
---------
The average number of employees of the Company, including Executive Directors,
for the following years ending on December 31, were:
[Download Table]
By Activity 2002 2001 2000
----------- ---- ---- ----
Development 25 21 20
Sales, marketing and technical support 53 46 40
Administration 15 13 13
------------------
93 80 73
==================
By Location
-----------
38
P-->

European Union 82 75 66
Rest of World 11 5 7
------------------
93 80 73
==================
E. Share Ownership
---------------
Directors and their interests. Details of beneficial holdings of the
members of the Company's Board of Directors at May 20, 2003 are given below.
[Download Table]
Name of Director Number of Percent
---------------- --------- -------
Shares Owned of Shares
------------ ---------
Donald A. Babbs 4,903,380 13.2%
Gerard George O'Driscoll 558,000 1.5%
*Elliot I. Miller 20,000 0.1%
*Stephen Palframan 0 0%
Richard Youhill 0 0%
Ivy Fredericks 0 0%
Total Director Shares 5,481,380 14.8%
<FN>
*Non Executive Directors
Mr. Babbs' interests include 58,000 shares held by his wife Nicoletta
Babbs.
Mr Millers' interests are held as American Depositary Receipts
Directors' Interests in Share Options. Peter Wharton was granted an option
in 1999 exercisable from October 21, 2001 until October 21, 2008. As of
December 31, 2002 the option consisted of rights to purchase 142,857 shares of
ordinary stock at 21 pence per share. None of these options were exercised and
with Mr Wharton's resignation these options have now lapsed.
Richard Youhill was granted an option in 1998 exercisable from April 2,2001 until April 2, 2008. As of May 20, 2003 the option consisted of rights to
purchase 17,000 shares of ordinary stock at 50 pence per share.
No other Director of the Company has any options to purchase securities of
the Company.
Employee Option Plans.
Introduction
------------
All employees may participate in the Company's Share Option Schemes at the
discretion of the Company's Remuneration Committee (the Share Option Schemes are
also referred to herein as the "Share Option Plans"). The Company's Remuneration
Committee administers the Share Option Plans in accordance with the Share Option
Scheme Rules. The Share Option Plans are subject to various limits on the number
of shares that may be issued in
39
P-->

respect of options granted under the Share Option Plans. These limits comply
with the guidelines of the Association of British Insurers. The Company has
three forms of option plans available to its employees, they are: the Approved
Scheme, the Unapproved Scheme and the Shadow Scheme. The rights and
restrictions of these Share Option Plans are discussed hereinbelow.
Operation of the Share Option Plans
----------------------------------------
Options which may not be transferred or encumbered in any way may be
granted within 42 days of Inland Revenue approval of the Plan in the case of the
Approved Plan (within 42 days from shareholder approval of the Unapproved Plan)
and, thereafter, normally within 42 days, after the announcement of the
Company's interim or final results. No payment is made for the grant of an
option.
The price at which the shares may be subscribed for by participants cannot
be less than the higher of:
(A) the nominal value of a share; or
(B) in relation to the Approved Plan, the market value determined by the
Board.
Options may normally only be exercised (in full or in part) after the third
anniversary of the date of grant. Under the Approved Plan, options not exercised
within ten years from the date of grant shall lapse. Options granted under the
Unapproved Plan will lapse if they are not exercised prior to the seventh
anniversary of the date of grant.
The Company will apply for shares allotted under the Share Option Plans to
be listed or admitted on any stock exchange or other market on which its
ordinary shares are then listed or traded.
Performance Conditions
-----------------------
Options to the sustained underlying financial performance of the Company.
Any such targets will be notified to the participant and disclosed in the Annual
Report and Accounts. However, the Committee may, at its discretion, select
different performance targets in the future, in which case details of the
revised performance targets will also be disclosed in the Annual Report and
Accounts for that year.
Early Exercise.
----------------
If a participant dies, his personal representatives may exercise his
options within 2 months of his death, notwithstanding that they may not have
become exercisable in the normal manner.
Early exercise is also permitted if a participant ceases to be an employee
or director of the Company in certain specified circumstances, for example,
redundancy or retirement. If a participant ceases to be a director or employee
other than in the specified circumstances, he may only exercise his options at
the discretion of the Board of Directors.
Early exercise of options would also be permitted in certain other
situations including a change in control of the Company or a voluntary
winding-up of the Company. In the event of a change in control, participants
may alternatively release their options in substitution for
40
P-->

the grant of options over shares in the acquiring company, subject to the
consent of the acquiring company.
Variation of Capital.
-----------------------
In the event of any variation in the share capital of the Company,
including a capitalization of rights issue, the number of shares subject to any
option and the exercise price relating to it may be adjusted subject to (except
in the case of a capitalization issue) the auditors confirming in writing that
such adjustment is, in their opinion, fair and reasonable and, in the case of
the Approved Plan, subject also to Inland Revenue approval.
Alterations to the Share Option Plans.
-------------------------------------------
Subject to certain specified exceptions, the prior approval of the Company in
the annual general stockholders meeting must be obtained for any alterations to
the Share Option Plans, other than any minor alterations to benefit the
administration of the Share Option Plans, if such alterations would be to the
advantage of participants. The exceptions relate to taking account of changes
in legislation or obtaining or maintaining favorable tax, exchange control or
regulatory treatment.
No alterations to the Approved Plan shall take effect without the prior
written consent of Inland Revenue.
The Shadow Plan.
------------------
Qualification under the Shadow Plan is achieved in a similar fashion to the
Share Option Plans. Therefore, except as described below, the summary
applicable to the Share Option Plans is also generally applicable to the Shadow
Plan. The key distinction between the two types of Plan is that a participant
under the Shadow Plan is not granted an interest in the Company's shares but a
right to receive what is referred to in the Shadow Plan as the "Cash
Equivalent". The Cash Equivalent is the amount by which the market value of the
number of shares in respect of which the shadow option has been granted at the
date of exercise exceeds the market value of those shares at the date of grant.
Shadow options may be exercised in similar circumstances and subject to similar
conditions applicable to the exercise of options under the Share Option Plans.
Like the Approved Plan, the life of a shadow option is limited to ten years,
rather than the seven years applicable to options granted under the Unapproved
Plan.
The main purpose of the Shadow Plan is to enable the Company to provide
equity-related incentives to employees whose participation in the Approved Plan
or the Unapproved Plan may, at the relevant time, not be practicable. For
example, local tax or securities laws in the jurisdiction in which an employee
is working may prevent or make difficult his or her participation in a share
option plan. In such circumstances, the Company considers it important that it
can, nonetheless, offer incentives which are comparable to those received by
other employees of the Company.
The Company regularly reviews its policy regarding share options and
considers making further grants of options in order to motivate, retain and
recruit employees and executives required for the future success of the
business. At the Company's Annual General Meeting held on June 18, 2002,
shareholders authorized the directors to adopt in addition to the existing
schemes described above ("the Existing Schemes"), such further employee
41
P-->

of the Machining Strategist business
None of the Company's major shareholders have different voting rights
At present, there are no ordinary shares of the Company known to be held in
the United States, but there are ADRs outstanding representing 23,000 ordinary
shares.
The Company is not directly or indirectly controlled by another
corporation, government or by any other legal or natural person.
To the extent known to the Company, there are no arrangements in existence
that may at a subsequent date result in a change of control of the Company.
There are no experts or counsel to the Company who own a material interest
in the Company.
B. Related Party Transactions.
--------------------------
Elliot I. Miller is of counsel to the firm Kleban & Samor, P.C., U.S.
legal counsel to the Company. Elliot Miller acts as a non-executive director of
Raven Technologies Inc., a software development company operating in the United
States which does not compete with the Company. Mr. Miller is of counsel to the
law firm of Kleban & Samor, P.C. which is the Company's legal counsel in the
United States. Mr. Miller is not a shareholder of such law firm and receives no
compensation based upon any fees paid to such law firm by the Company. In 2002,
the Company paid fees and disbursements to such law firm of $ 111,000 for
services rendered.
Ivy Lindstrom Fredericks is an officer of Westminster Securities Corp.
which has been engaged by the Company to conduct a private placement of the
Company's shares as described in Item 10c herein.
ITEM 8. FINANCIAL INFORMATION.The Company's financial condition is presented in the consolidated
financial statements and the related notes included in this filing and
incorporated by reference herein.
ITEM 9. LISTING INFORMATION
A. Listing Details.
---------------
Price History of Stock. The following table reflects the high and low
mid-market price per share of the Company's ordinary shares, as reported on AIM
since April 2, 1998.
[Download Table]
$ per share
High Low
1999 0.67 0.19
2000 0.71 0.33
2001
First quarter 0.50 0.38
Second quarter 0.38 0.36
43
P-->

A. Share Capital
-------------
Not Applicable
--------------
B. Articles of Association.
-----------------------
The information called for by this item has been reported previously in the
Company's Registration Statement on Form 20-F, effective May 22, 2001 and is
hereby incorporated by reference in this Report.
C. Material Contracts.
------------------
Share Sale Agreement with Vero Tooling Solutions, Inc. On May 9, 2002 the
Company's US subsidiary Vero International Inc. entered into an agreement with
the two principal owners ("the Sellers") of Vero Tooling Solutions, Inc. the
Company's distributor in Canada. Under this Agreement the Company acquired 100%
ownership of Vero Tooling Solutions, Inc. for a consideration to the Sellers at
Closing of $1, forgiveness of indebtedness of $259,000 and the assumption of
$355,000 in indebtedness. Each of the Sellers have entered into employment
agreements with the Vero International Inc for an indefinite term. Under the
terms of the employment agreements, the Sellers are entitled to receive annual
aggregate remuneration at the rate of $188,000 in basic salary and bonus
payments based upon sales made by such employee.
Sale and Purchase Agreement with NC Graphics (Cambridge) Ltd. On September28, 2002the Company purchased the Machining Strategist (3D CAM) business from
NC Graphics (Cambridge) Ltd, a UK company and Arthur Flutter (Managing Director
of NC Graphics (Cambridge) Ltd. The purchased business included the joint
ownership of the Machining Strategist intellectual property, exclusive ownership
of the Machining Strategist name, goodwill and the transfer of Machining
Strategist end users, foreign distributors and sales, support and development
staff. The consideration for the Machining Strategist business was $1.5 million
in cash and shares valued at $374,000. Under the terms of the agreement the
Sellers are not allowed to dispose of the share based consideration for a period
of eighteen months from the date of the agreement. The $1.87 million
consideration was allocated as follows: distribution rights $0.62 million,
intellectual property $1.25 million. The former Sales Director and the former
Development Director of NC Graphics (Cambridge ) Ltd simultaneously transferred
their employment pursuant to specific employment agreementswith Vero
International Software (UK) Ltd. Other staff joined Vero International Software
(UK) Ltd in accordance with the terms and conditions of the UK TUPE employment
rules.
Transfer of Business Agreement with Ing. Boleslav Ziman. On August 29, 2002
Vero International Software Srl, the Italian subsidiary of the Company, sold its
shareholding in VISI-Sro the wholly owned Czech Republic subsidiary to Boleslav
Ziman for a consideration
45
P-->

of $33,000. Boleslav Ziman had been the manager of this subsidiary since its
formation in 1990. The consideration is to be paid over a projected period of 30
months in the form of increased software license charges for the sale of the
Company's software products. The Company simultaneously signed an exclusive
distribution agreement with VISI Sro for the sale of VISI-Series software
products in the territories of the Czech republic and Slovakia.
Termination Agreement with SIID Ltd of Japan. SIID had purchased the
CAD/CAM business of a company known as SII in April of 2002 including the
distribution agreements pertaining to the distribution of VISI-Series products
in Japan. On 6th November Vero International Software UK Ltd effected an
agreement with SIID Ltd of Japan terminating the long standing exclusive
distribution arrangements for VISI-Series products in Japan and the sale by the
Company of SIID software products worldwide. Under the terms of the agreement
SIID ceased the sale of VISI-Series in Japan on April 1st 2003 and it is
anticipated that the Company will cease the sale of SIID products from November
2003 onwards.
The agreement described the handover arrangements, transfer of Japanese
language rights and dealer agreements. No consideration was envisaged under the
agreement.
The Company has since set up a wholly owned subsidiary in Tokyo to continue
the distribution of VISI-Series products in this important market.
Real Property Leases. See Item 4.D for a summary of the real property
leases currently held by the Company and its subsidiaries.
License Agreements. At present the Company licenses a number of component
software technologies from third parties suppliers that must remain
confidential. Component libraries are licensed under these agreements and
integrated with the Company's software. In the future, the Company will likely
continue to require further license rights to patents or other intellectual
property held by others on an ongoing basis.
Private Placement. Pursuant to an engagement letter dated 15 November,
2001 (the "Engagement Letter"the Company engaged Westminster Securities Corp.
("Westminster") to act as placement agent in connection with the sale of its
ordinary shares in a proposed private placement (the "Private Placement"). See
Exhibit 12(a)(i). Westminster was not successful in completing the Private
Placement, however Westminster was successful in arranging the investment by
Hemisphere Capital Corp. in the $1.0M Convertible Debenture described herein on
January 10, 2003.
The Company has compensated Westminster to date $120,000 and reimbursed
Westminster for legal fees and related expenses totaling $16,001.
Finally, the Company is obligated to issue and sell to Westminster, five
(5) year warrants to purchase 18,334 ADRs an exercise price of $5.4515per ADR
at a price of $.0001 per warrant (the "Warrants").
On January 10, 2003, the Company issued a $1.0 million convertible
debenture ("Debenture" to Hemisphere Capital, LLC, a private equity investor
based in London, with an office in Boston, Massachusetts that is engaged
primarily in investing in information technology businesses in Western Europe.
The Debenture bears interest at 9% per annum, is convertible in certain
circumstances into American Depositary Receipts ("ADRs") of the Company at a
price of $4.5429 per ADR, with each ADR representing 20 ordinary shares and
46
P-->

will mature no later than January 10, 2006. The Debenture would be convertible
into 4,402,460 ordinary shares subject to anti-dilution and other similar
adjustments. A copy of the Debenture is included herein as Exhibit 12(a)(iii) to
this Report.
Under the terms of the Debenture, Hemisphere has the right to subscribe for
between $2.M and $4.0M of preference shares of the Company (the "Preference
Shares") for a period of 120 days after notice from the Company offering to sell
the Preference Shares to Hemisphere, following approval of the Preference Shares
by the Company's Board of Directors and shareholders. The Debenture is due and
payable, if not sooner converted, upon various contingencies, including failure
of the Company's shareholders at an extraordinary general meeting held for the
purpose to authorize the Preference Shares on or before July 31, 2003. The
Company has the option to require conversion of the Debenture into ordinary
shares as of the final maturity date of the Debenture.
The Company intends to seek the authorization of its shareholders for the
issuance of the Preference Shares at an extraordinary general meeting of
shareholders to be held in July, 2003.
A more complete description of the terms of the Debenture and the
Preference Shares is contained in the Loan and Investment Agreement dated
January 10, 2003 between the Company and Hemisphere which is Exhibit 12(a)(ii)
to this Report.
D. Exchange Controls.
-----------------------
None
E. Taxation.
------------
Taxation in the United Kingdom.
----------------------------------
The following paragraphs provide a general guide, based on current
legislation and practice, to the UK tax position of UK residents holding their
shares (otherwise than under a Personal Equity Plan or Individual Savings
Account) as investments and not as trading stock. Any person who is in doubt as
to his taxation position or requires information which is more detailed than the
general outline below should consult his professional advisors.
Dividends. Under current UK taxation legislation no tax will be withheld
from dividend payments by the Company.
An individual shareholder who is resident (for tax purposes) in the UK and
who receives a dividend from the Company will currently be entitled to receive a
tax credit equal to 10 percent of the combined total of the dividend and the tax
credit. The UK income tax charge in respect of dividends for lower and basic
rate taxpayers is regarded as met in full by the tax credit and such
shareholders will have no further liability to tax on a dividend received from
the Company. Higher rate taxpayers will be liable to tax on the sum of the
dividend plus the associated tax credit at the Schedule F rate (currently 32.5
percent) against which liability they can offset the associated tax credit.
Subject to certain exceptions for
47
P-->

certain insurance companies and companies which hold shares as trading stock, a
UK resident corporate shareholder which receives a dividend paid by the Company
will not be taxable on the dividend. The dividend received (together with the
associated credit) will be treated as franked investment income of the company
receiving the dividend. After April 6, 1999 the repayment of tax credits is
limited to certain specialist categories which are entitled to special
exemptions and reliefs.
Capital Gains. A disposal of shares by a shareholder resident or ordinarily
resident for tax purposes in the UK or a shareholder who carries on a trade,
profession or vocation in the UK through a branch or agency and has used, held
or acquired the shares for the purposes of such trade, profession or vocation or
such branch or agency may, depending on the shareholder's circumstances, and
subject to any available exemptions, allowances or reliefs, give rise to a
chargeable gain or an allowable loss for the purposes of UK taxation of
chargeable gains. Special rules apply to disposals by individuals at a time
when they are temporarily not resident or ordinarily resident in the UK.
United States Federal Income Taxation
-----------------------------------------
The following discussion is a summary of the material U.S. federal income
tax and UK tax consequences of the purchase, ownership and disposition of the
Company's shares by a U.S. Holder. The discussion is based on the Internal
Revenue Code of 1986, as amended, U.S. Treasury Regulations promulgated
thereunder and judicial and administrative interpretations thereof, all as in
effect on the date hereof and all of which are subject to change, possibly
retroactively. This discussion is also based on the double tax convention
between the UK and U.S. (the "Convention") which came into force in March 2003
with effect from 1 May 2003 in respect of taxes withheld at source.
Notwithstanding the entry into force of this Convention, a US Holder may elect
for the old convention to apply for a period of 12 months from the date on which
the relevant provisions of the new Convention came into effect. For example, a
US holder may elect for the old convention to apply to and distributions made by
the Company on or before 30 April 2003. US Holders should consult their tax
advisers in relation to whether this treatment would be beneficial to their
personal circumstances.
The discussion is not a full discussion of all tax considerations that may
be relevant to a U.S. Holder's decision to purchase shares. The discussion
addresses only U.S. Holders that will hold shares as capital assets and that use
the U.S. dollar as their functional currency. The discussion does not address
the tax treatment of investors subject to special rules under the Convention or
the US Internal Revenue Code 1986 such as banks, broker-dealers, insurance
companies, regulated investment companies, tax-exempt entities, dual-resident
taxpayers, non-U.S. persons, investors that own directly, indirectly or by
attribution 10 per cent or more of the Company's voting shares and investors
holding shares as part of a hedging, straddle, conversion, constructive sale or
similar transaction.
Prospective investors are urged to consult their tax advisors regarding the
U.S. federal, state, local and foreign tax consequences to them of an investment
in the Company's shares.
As used in this discussion, the term "U.S. Holder" means a beneficial owner
of shares that does not maintain a "permanent establishment" or "fixed base" in
the UK, as such terms are defined in the UK-US income tax treaty, and that is
either (i) an individual citizen or resident of the United States, (ii) a
corporation organized in or under the laws of the United
48
P-->

States or a political subdivision thereof, (iii) a trust subject to the control
of a U.S. person and the primary supervision of a U.S. court, (iv) an estate the
income of which is subject to U.S. federal income taxation regardless of its
source or (v) a partnership, to the extent the interests therein are
beneficially owned by any of the persons described in clauses (i), (ii), (iii)
or (iv) above.
DIVIDENDS
The UK does not currently apply a withholding tax on dividends under its
internal laws. If the UK were to impose a withholding tax , as permitted under
the Convention, the rate of such withholding will not exceed 15% of the dividend
paid to a U.S. Holder. In such circumstances, a U.S. Holder should be entitled
to a credit for such withholding tax, subject to applicable limitations, against
the U.S. Holder's federal income tax liability.
Subject to the passive foreign investment company rules described below,
the amount of any dividends paid out of current and/or accumulated earnings and
profits, as determined under U.S. tax principles, will be included in the gross
income of a U.S. Holder on the day such dividends are actually or constructively
received and will be characterized as ordinary income for U.S. federal income
tax purposes. To the extent that a dividend exceeds current and accumulated
earnings and profits, it will be treated as a non-taxable return of capital to
the extent of a U.S. Holder's adjusted basis in the shares, and thereafter as a
capital gain. The Company does not currently maintain calculations of its
earnings and profits under U.S. tax principles. Dividends paid by the Company
to corporate U.S. Holders will not be eligible for the dividends-received
deduction that might otherwise be available if such dividends were paid by a
U.S. corporation.
Dividends paid by the Company in pounds sterling will be included in a U.S.
Holder's income when the distribution is actually or constructively received by
the U.S. Holder. The amount of the dividend distribution includible in the
income of a U.S. Holder will be the U.S. dollar value of the pounds sterling,
determined by the spot rate of exchange on the date of the distribution,
regardless of whether the pounds sterling are actually converted into U.S.
dollars at such time. If the pounds sterling received as a dividend are not
converted into U.S. dollars on the date of receipt, then a U.S. Holder may
realize an exchange gain or loss on a subsequent conversion of such pounds
sterling into U.S. dollars. The amount of any gain or loss realized in
connection with a subsequent conversion will be treated as ordinary income or
loss and generally will be treated as US-source income or loss for foreign tax
credit purposes.
On May 28, 2003, President Bush signed into law the Jobs and Growth Tax
Relief Reconciliation Act of 2003 (the "2003 Act"). Under the 2003 Act,
"qualifying dividends" from domestic corporations received in tax years
beginning after December 31, 2002 are to be taxed at a 15% rate for most
individual taxpayers. Individuals in the 10% or 15% bracket will be subject to a
5% rate on dividend income. A specific holding-period requirement for
dividend-paying stock and several other special rules apply.
CAPITAL GAINS
Under the Convention, each country may tax capital gains in accordance with
its own domestic law. Under current UK law, a U.S. Holder who is neither
resident or ordinarily resident for tax purposes in the UK will not be liable
for UK tax on capital gains realized on the sale or other disposal of shares
unless, in the year of assessment in which the gain accrues
49
P-->

to such holder, that U.S. Holder carries on a trade in the UK through a branch
or agency and the shares are or have been used by, held by, or acquired for use
by, or for the purpose, of such trade, branch or agency. However, a U.S. Holder
who has been resident in the UK for at least four years and held shares or at
that time may, in certain circumstances, become liable to UK capital gains tax
on his return to the UK following a disposal of such shares. Any U.S. Holders
whose circumstances are such that they may fall within such provisions are
advised to consult their tax adviser.
Subject to the passive foreign investment company rules described below, a
U.S. Holder generally will recognize capital gain or loss on the sale or other
disposition of the shares in an amount equal to the difference between the
amount realized in such sale or disposition and the U.S. Holder's adjusted tax
basis in the shares. Such capital gain or loss will be long-term capital gain
or loss if a U.S. Holder has held the shares for more than one year and
generally will be U.S.-source income for foreign tax credit purposes. Long-term
capital gains realized by an individual U.S. Holder on a sale or other
disposition of shares are generally subject to reduced rates of taxation. The
deductibility of capital losses is subject to limitations. A U.S. Holder that
receives foreign currency upon the sale or other disposition of the shares
generally will realize an amount equal to the U.S. dollar value of the foreign
currency on the date of sale (or, if the shares are traded on an established
securities market, in the case of cash basis taxpayers and electing accrual
basis taxpayers, the settlement date). A U.S. Holder will have a tax basis in
the foreign currency received equal to the U.S. dollar amount realized. Any
gain or loss realized by a U.S. Holder on a subsequent conversion or other
disposition of foreign currency will be ordinary income or loss and will
generally be U.S. source income for foreign tax credit purposes.
On May 28, 2003, President Bush signed into law the Jobs and Growth Tax Relief
Reconciliation Act of 2003 (the "2003 Act"). Under the 2003 Act, effective for
sales, exchanges, and payments received on or after May 6, 2003, and before
January 1, 2009, the long-term capital gains tax rate is reduced from 20% to 15%
for most taxpayers, and from 10% to 5% for gains that otherwise would be taxed
in the 10% or 15% bracket if they were ordinary income.
UK INHERITANCE TAX
Shares held by an individual who is domiciled in the U.S. for the purposes
of the double taxation convention relating to estate and gift taxes between the
U.S. and the UK, and for the purposes of the convention is not a national of the
UK, will not be subject to UK inheritance tax on the individual's death or on a
lifetime transfer of shares, except in certain cases where the shares are placed
in trust (other than by a settlor domiciled in the U.S. who is not a national
of the UK) and, in the exceptional case, where the shares are part of the
business property of a UK permanent establishment of an enterprise or pertains
to a UK fixed base of an individual used for the performance of independent
personal services. The convention generally provides a credit for the amount of
any tax paid in the UK against the U.S. federal tax liability in a case where
the shares are subject both to UK inheritance tax and to U.S. federal gift or
estate tax.
PASSIVE FOREIGN INVESTMENT COMPANY RULES
Special U.S. tax rules apply to U.S. shareholders in companies that are
considered passive foreign investment companies ("PFICs"). The Company will be
classified as a PFIC in a particular tax year if either
50
P-->

- 75 percent or more of its gross income is passive income; or
- the average percentage of the value of its assets that produce or are held
for the production of passive income is at least 50 percent. Cash balances,
even if held as working capital, are considered to be passive.
In the event that the Company is classified as a PFIC in any year, a U.S.
Holder can elect to mark its shares to market. If a U.S. Holder makes a
mark-to-market election, it will be required in any year in which the Company is
a PFIC to include as ordinary income the excess of the fair market value of its
shares at year-end over its basis in those shares. In addition, any gain it
recognizes upon the sale of its shares will be taxed as ordinary income in the
year of sale.
If the Company is determined to be a PFIC and a U.S. Holder does not make a
mark-to-market election, it will be subject to a special tax at ordinary income
tax rates on "excess distributions", including certain distributions by the
Company and gain on the sale of its shares. The amount of income tax on excess
distribution will be increased by an interest charge to compensate for tax
deferral, calculated as if excess distributions were earned ratably over the
period it holds its shares. Classification as a PFIC may also have other
adverse tax consequences, including in the case of individuals, the denial of a
step-up in the basis of such individual's shares at death.
U.S. Holders should consult their tax advisers regarding the U.S. federal
income tax considerations discussed above and the desirability of making a
mark-to-market election.
UK STAMP DUTY
No stamp duty or stamp duty reserve tax (SDRT) will be payable in the United
Kingdom on the purchase or transfer of an ADS, provided that the ADS , and any
separate instrument or written agreement of transfer, remain at all times
outside the United Kingdom and that the instrument or written agreement of
transfer is not executed in the United Kingdom. Stamp duty or SDRT is, however,
generally payable at the rate of 1.5% of the amount or value of the
consideration or, in some circumstances, the value of the ordinary shares, where
ordinary shares are issued or transferred to a person whose business is or
includes issuing depositary receipts, or to a nominee or agent for such a
person.
A transfer for value of the underlying ordinary shares will generally be
subject to either stamp duty or SDRT, normally at the rate of 0.5% of the amount
or value of the consideration. A transfer of ordinary shares from a nominee to
its beneficial owner, including the transfer of underlying ordinary shares from
the Depositary to an ADS holder, under which no beneficial interest passes is
subject to stamp duty at the fixed rate of 5.00 per instrument of transfer
F. Dividends and Paying Agents
----------------------------------
Not Applicable.
G. Statement by Experts.
---------------------------
Not Applicable
51
P-->

H. Documents on Display.
---------------------------
You may read and copy all or any portion of this Annual Report or any reports,
exhibits, statements or other information filed by the Company at the
Securities and Exchange Commission's public reference room at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. The Company will file periodic reports on Form
6-K reporting information that the Company (i) makes or is required to make
public pursuant to the law of the jurisdiction in which it is incorporated, or
(ii) files or is required to file with any stock exchange on which its
securities are traded and which was made public by that exchange, or (iii)
distributes or is required to distribute to its securityholders. As a foreign
issuer the Company will not be subject to the proxy rules of Exchange Act Sec.
14 or the insider short-swing profit reporting requirements of the Exchange Act
Sec. 16.
Pursuant to AIM Rule 16 a company must prepare half-yearly reports which
must be notified to the Company announcements office without delay and in any
event not later than three months after the end of the relevant period. Under
this rule the Company is required to report results for the six months to the
end of June of each year.
Pursuant to AIM Rule 17 an AIM Company must publish annual audited accounts
prepared in accordance with United Kingdom or United States generally accepted
accounting practice or international accounting standards. These accounts must
be sent to the holders of its AIM securities without delay and in any event not
later than six months after the end of the financial period to which they
relate. Since admission to AIM, the Company has prepared and distributed annual
accounts under United Kingdom GAAP for each year ending on December 31st.
I. Subsidiary Information
-------------------------
Not Applicable
--------------
ITEM 11. QUANTITATIVE AND QUALITATIVE FACTORS ABOUT MARKET RISK -
The following table provides information about the Company's significant
derivative financial instruments that are sensitive to changes in exchange rates
as of December 31, 2002.
Foreign-Exchange Risk Management
For foreign currency forward contracts related to certain sale and purchase
transactions denominated in foreign currencies, the table presents the notional
amounts and the weighted average contractual forward exchange rates. The
foreign currency forward contracts entered into by the Company have a term of
generally less than one year. The Company had $2,302,000 notional amount of
foreign currency forward contracts outstanding in various currencies at
December 31, 2002
52
P-->

[Download Table]
Average
Contract Contractual Fair Value at
Amount Buy Forward December
Foreign Currency Forward Contracts (Sell) Exchange Rate 31, 2002
Euro $ (524,000) 1.56 Euro/GBP $ nil
U.S. Dollar $(1,500,000) 1.59 USD/GBP $ 13,830
Yen $ (278,000) 192 Yen/GBP $ nil
Generally forward currency contracts hedge the Company's exposure to changes in
exchange rates on monetary assets and liabilities denominated in currencies
other than the functional currency of the Company or its subsidiaries.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.NONE
On January 10, 2003, the Company issued a $1.0 million convertible
debenture ("Debenture" to Hemisphere Capital, LLC. The Debenture will bear
interest at 9% per annum, is convertible in certain circumstances into American
Depositary Receipts ("ADRs") of the Company at a price of $4.5429 per ADR, with
each ADR representing 20 ordinary shares and will mature no later than January10, 2006. The Debenture would be convertible into 4,402,460 ordinary shares
subject to anti-dilution and other similar adjustments.
Under the terms of the Debenture, Hemisphere has the right to subscribe for
between $2.M and $4.0M of preference shares of the Company ("Preference Shares")
for a period of 120 days after notice from the Company offering to sell the
Preference Shares to Hemisphere, following approval of the Preference Shares by
the Company's Board of Directors and Shareholders. The Debenture shall become
due and payable, if not sooner converted, upon various contingencies, including
failure of the Company's shareholders at an extraordinary general meeting held
for the purpose to authorize the Preference Shares. The Company has the option
to require conversion as of the final maturity date of the Debentures.
A more complete description of the terms of the Debenture and the
Preference Shares is contained in the Loan and Investment Agreement dated
January 10, 2003 between the Company and Hemisphere which is Exhibit 12(a)(ii)
to this Report.
The Company intends to seek the authorization of its shareholders for the
issuance of the Preference Shares at an extraordinary general meeting of
shareholders to be held in July, 2003.
53
P-->

SIGNATUREThe registrant hereby certifies that it meets all of the filing requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Annual Report on its behalf.
VI GROUP PLC
By: s/Elliot I. Miller
-----------------------------
Elliot I. Miller
Director and Deputy Chairman
of VI Group plc.
Date: June 26, 2003
i
P-->

CERTIFICATIONS
I, Donald A. Babbs, the Chief Executive Officer and acting Chief Financial
Officer, certify that:
1) I have reviewed this annual report on Form 20-F of VI Group plc (the
"registrant").
2) Based on my knowledge , this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this by this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 26, 2003
s/Donald A. Babbs
-----------------
Signature: Donald A. Babbs
Title: Chief Executive Officer and Acting
Chief Financial Officer
2
P-->

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the annual report on Form 20F (the "Report") of VI Group
plc (the "Company") for the period ending December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Donald
A. Babbs, Chief Executive Officer of the Company, certify, to the best of my
knowledge, pursuant to 18 U.S.C. Sec.1350, as adopted pursuant toSec.906 of the
Sarbanes-Oxley Act of 2002, that:
1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
s/ Donald A.Babbs
--------------------------------------------
Donald A. Babbs, Chief Executive Officer
VI Group plc
June 26, 2003
3
P-->

INDEPENDENT AUDITORS' REPORT
To the Shareholders of
VI Group plc
We have audited the accompanying consolidated balance sheets of VI Group plc and
its subsidiaries as of December 31, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 2002, 2001 and 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of VI Group plc and its
subsidiaries as of December 31, 2002 and 2001 and the results of its operations
and its cash flows for the years ended December 31, 2002, 2001 and 2000, in
conformity with accounting principles generally accepted in the United States.
Moore Stephens
Chartered Accountants
St. Paul's House
London, EC4P 4BN
April 24, 2003F-1
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)1. OPERATIONS
VI Group plc (the "Company") was incorporated in the United Kingdom on
November 5, 1997 as a public limited company and commenced operations on
January 1, 1998. The Company and its subsidiaries, develop, and distribute
Computer Aided Design (CAD) and Computer Aided Manufacturing (CAM) software
that enhances the efficiency of the design and manufacturing process in
industry.
On February 12, 1998, the Company completed the acquisition of Vero
International Software S.r.l. (Italy). This transaction was accounted for
under the requirements of Interpretation 39 of Accounting Standards Board
Opinion No. 16, whereby the acquisition was treated as a transfer of shares
between companies with common control in a manner similar to a pooling of
interests. Accordingly, all assets and liabilities of the acquired company
were recognised at historical cost and the historical financial statements
of the acquired company became a component of the historical financial
statements of the Company.
The Company faces numerous risks associated with its industry. These risks
include dependence on new product introductions, product delays, rapidly
changing technology, intense competition and dependence on distribution
channels.
For presentation of the Consolidated Statements of Operations in EBITDA
(Earnings before interest, tax, depreciation and amortization) format
please see Item 5 of form 20-F.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
VI Group plc and its wholly-owned subsidiaries, Vero International Software
S.r.l. (Italy), Vero Sistemi e Consulenze S.r.l. (Italy), Vero Tecnologie
S.p.A (Italy), Vero International Software UK Limited (UK), Visi S.R.O.
(Czech Republic) and Vero International Inc. (USA). All significant
intercompany accounts and transactions have been eliminated.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) CASH AND CASH EQUIVALENTS
For the purposes of the Company's consolidated statement of cash flows, the
Company considers all highly liquid securities and debt instruments with
original maturities of three months or less to be equivalent to cash.
F-6
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (d) INVENTORIES
Inventories consisting of compact disks, manuals and packaging materials
and supplies are valued at the lower of cost (first-in, first-out) or
market.
(e) TRADE RECEIVABLES
Trade receivables are amounts invoiced and due from customers less any
provision for bad debts.
(f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less depreciation. Office
equipment, computer equipment, and Motor vehicles are depreciated using the
straight-line method over estimated useful lives ranging from four to eight
years. Leasehold improvements are amortized on a straight-line basis over
the lesser of the estimated useful life or the remaining lease term.
(g) OTHER NON-CURRENT ASSETS
Other non-current assets consist primarily of capitalized software and
goodwill on consolidation.
Capitalized Software consists of purchased software products and is stated
at un-amortized cost. The amortization for purchased software products is
computed on a product-by-product basis. The annual amortization is the
greater of the amount computed using (a) the ratio that current gross
revenues for a product bear to the total of current and anticipated future
revenues for that product or (b) the straight-line method over the
remaining estimated economic life of the product, including the period
being reported on. The amortization period for capitalized software is
generally five years.
The excess of the purchase consideration over the fair value of acquired
tangible assets is attributed to skilled workforce, intellectual property
and goodwillEach element was amortized over between 1 and 10 years, using
the straight line method, until December 31 2001. Effective January 1, 2002the company adopted Statement of Financial Accounting Standards ("SFAS")
No.142, "Goodwill and Other intangible Assets". Under this Standard,
goodwill is no longer amortized but reviewed for impairment at least
annually.
(h) LONG-LIVED ASSETS
As prescribed by Statement of Financial Accounting Standards ("SFAS") No.
144, "Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of", the Company assesses the recoverability of its
long-lived assets (including goodwill) by determining whether the asset
balance can be recovered over the remaining depreciation or amortization
period through projected un-discounted future cash flows. Cash flow
projections, although subject to a degree of uncertainty, are based on
trends of historical performance and management's estimate of future
performance, giving consideration to existing and anticipated competitive
and economic conditions.
F-7
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and notes
payable approximates the fair value. In addition, the carrying value of all
borrowings approximate fair value based on interest rates currently
available to the Company.
(j) REVENUE RECOGNITION The Company derives revenues principally from two sources, customer license
fees on its VISI-Series products and service fees.
The Company recognizes revenue based on the provisions of Statement of
Position ("SOP") 97-2, "Software Revenue Recognition". As no significant
modification to the Company's software products is required, software
license revenues are recognized upon persuasive evidence of an arrangement,
delivery and acceptance of the software, and when collection of a fixed or
determinable license fee is considered probable. Agreements may provide the
customers the right to multiple copies in exchange for guaranteed amounts,
only if copies are requested by the customer. The license fee is payable
even if no additional copies are requested by the customer. Revenue is
recognized at the delivery of the product master or the first copy and the
estimated costs of duplication, incidental to the arrangement, are accrued.
Service revenues consist of fees from maintenance and technical support
agreements and consulting or training arrangements. Maintenance revenue,
when bundled with the sale of software licenses, is recognised together
with the initial licensing fee on delivery of the software as (a) the
maintenance fee is included with the initial licensing fee, (b) maintenance
included with the initial license is for one year or less, (c) the
estimated cost of providing maintenance during the arrangement is
insignificant, and (d) unspecified upgrades/enhancements offered during the
maintenance arrangement historically have been and are expected to continue
to be minimal and infrequent. All estimated costs of providing the
services, including upgrades/enhancements are accrued. Maintenance revenue
under separate arrangements is deferred and recognized on a straight-line
basis over the term of the agreement; amounts received in advance of
revenue recognition are classified as deferred revenue. Maintenance
agreements provide for technical support and periodic unspecified product
upgrades. Revenues from consulting services or training are measured by the
relationship of hours incurred and estimated total hours of the contract or
training course. Revisions in estimated hours are reflected in the
accounting period in which the required revisions become known.
F-8
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The Company sells software licenses to distributors at a predetermined
price. Distributors are responsible for supplying maintenance and customer
support to the end customer. The Company may provide maintenance and
customer support to the distributors. Revenues on these sales are
recognized in the same manner as all other software license and maintenance
sales. These sales are not contingent upon the distributors' resale of the
software.
The Company is generally not contractually obligated to accept returns,
except for defective, shelf-worn and damaged products in accordance with
negotiated terms. In accordance with SFAS No. 48, "Revenue Recognition when
Right of Return Exists", revenue is recorded net of an allowance for
estimated returns, exchanges, markdowns, price concessions, and warranty
costs. Such reserves are based upon management's evaluation of historical
experience, current industry trends and estimated costs. The amount of
reserves ultimately required could differ materially in the near term from
the amounts included in the accompanying consolidated financial statements
(k) PRODUCT DEVELOPMENT
Product development costs incurred in the research and development of new
software products and enhancements to existing software products are
expensed as incurred until technological feasibility has been established.
The Company considers technological feasibility to be established when all
planning, designing, coding, and testing has been completed according to
design specifications. After technological feasibility has been
established, any additional costs would be capitalized in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the
Cost of Computer Software to be Sold, Leased, or otherwise Marketed."
Through December 31, 2002, software development has been substantially
completed concurrently with the establishment of technological feasibility,
and accordingly, no costs have been capitalized to date.
(l) ADVERTISING COSTS The Company generally expenses advertising costs as incurred, except for
production costs associated with media campaigns, which are deferred and
charged to expense at the first run of the advert. Advertising costs were
$122, $124 and $160 for the year 2002, 2001 and 2000 respectively,
(m) INCOME TAXES The Company accounts for income taxes using the liability method as
prescribed by SFAS No. 109, "Accounting for Income Taxes." The statement
requires an asset and liability approach for financial accounting and
reporting of income taxes. Deferred income taxes are provided for temporary
differences in the recognition of certain income and expense items for
financial reporting and tax purposes given the provisions of the enacted
tax laws.
F-9
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (n) FOREIGN CURRENCY The Company follows the principles of SFAS No. 52, "Foreign Currency
Translation," using the local currency of its operating subsidiaries as the
functional currency. Accordingly, all assets and liabilities outside the
United States are translated into U.S. dollars at the rate of exchange in
effect at the balance sheet date. Income and expense items are translated
at the weighted average exchange rate prevailing during the period. Gains
or losses arising from the translation of non U.S. companies financial
statements are included in the accompanying consolidated balance sheets as
a separate component of stockholders' equity.
Gains and losses resulting from foreign currency transactions are included
in the determination of net income. (Losses)/gains from foreign currency
transactions amounting to $(27), $(9), and $77 during the years ended
December 31, 2002, 2001 and 2000, respectively, and are included in general
and administrative expenses in the consolidated statements of operations.
(o) EARNINGS PER SHARE The Company accounts for earnings per share in accordance with SFAS No. 128
"Earnings Per Share" and SFAS No. 129, "Disclosure of Information about
Capital Structure." Basic earnings per share is computed by dividing income
attributable to common stockholders by the weighted average number of
common shares outstanding. Diluted earnings per share is computed by
dividing income attributable to common stockholders by the weighted average
number of common shares outstanding plus the effect of any dilutive stock
options and common stock warrants.
For the year ended December 31, 2002, all options to purchase common stock
were excluded from the diluted loss per share calculation as the effect of
such inclusion would be antidilutive.
(p) COMPREHENSIVE INCOME (LOSS) The Company has adopted SFAS No. 130, "Reporting Comprehensive Income".
Comprehensive income of the Company includes net income adjusted for the
change in foreign currency translation adjustments. The net effect of
income taxes on comprehensive income is immaterial. The disclosures
required by SFAS No. 130 have been included in the Statements of
Stockholders' Equity.
(q) STOCK-BASED COMPENSATION The Company accounts for employee stock options in accordance with the
Accounting Principles Board Opinion No. 25 and makes the necessary pro
forma disclosures mandated by SFAS No. 123. In accordance with APB No. 25,
the Company recognizes compensation expense for fixed stock option grants
only when the exercise price is less than the fair value of the shares on
the date of grant.
F-10
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (r) LEASES The Company follows the principles of SFAS No. 13 "Accounting for Leases".
Assets acquired under capital leases are recorded as assets in the balance
sheet and depreciated over their estimated useful lives or the lease term,
whichever is the shorter. The interest element of these obligations is
charged to the statement of operations over the relevant period. The
capital element of the future payments is treated as a liability. Rentals
payable under operating leases are charged to the statement of operations
as incurred.
(s) DERIVATIVE FINANCIAL INSTRUMENTS
In accordance with SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities"the company may use forward contracts to hedge exposure
to changes in the fair value of monetary assets and liabilities denominated
in currencies other than the functional currency of the company or its
subsidiaries. Unrealised gains and losses arising from movements in foreign
currency exchange rates on qualifying and non-qualifying fair value hedging
instruments are recognised in the accompanying statement of operations.
(s) RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2002, the Company adopted SFAS No. 142 "Goodwill and other
Intangible Assets". Under this standard, goodwill is no longer amortized
but reviewed for impairment at least annually. The standard also provides
guidance on the accounting for other intangible assets. An acquired
intangible asset (other than goodwill) with an indefinite useful life
should not be amortized until its useful economic life is determined to be
finite. These assets should be tested for impairment at least annually. An
acquired intangible asset (other than goodwill) with a limited useful life
should be amortized over its useful economic life and reviewed for
impairment in accordance with SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets.
On January 1, 2002, the Company adopted SFAS No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets". This standard supersedes SFAS
No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" but retains the basic requirements
regarding when and how to measure an impairment loss. SFAS No. 144 applies
to long-lived assets to be held or disposed of but specifically excludes
certain classes of assets such as goodwill and intangible not being
amortized.
(t) RECLASSIFICATIONS
Certain reclassifications have been made to the prior-year financial
statements to conform to the current-year presentation.
F-11
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)7. BANK OVERDRAFT AND OTHER SHORT TERM DEBT The Company's overdrafts are secured by fixed and floating charges over the
assets of Vero International Software S.r.l. and Vero International
Software UK Limited. Interest rates are variable and ranged from 6.875% to
9.175% and 6.0% to 7.05% as of December 31, 2002 and 2001, respectively.
The Company has bank facilities available to its subsidiaries. The Italian
subsidiary has facilities of up to $0.74 million dollars, from a
combination of three separate banks, available in Italian Lira at between
1% to 3% above the bank base rate. The UK subsidiary has a multi-currency
facility of up to $0.8 million secured on qualifying trade debtors when
outstanding at an interest rate of 1.5% above the UK bank base rate. On
December 31, 2002, the amount borrowed under such facilities was $0.74
8. OTHER ASSETS
Other
Goodwill Software intangible Total
licences assets
Cost:
As at 1 January 2002 620 300 196 1,116
Exchange movements 151 97 23 271
Additions - - 6 6
Acquisitions 1,244 1,233 - 2,477
---------- --------- ----------- ------
As at December 1, 2002 $ 2,015 1,630 225 3,870
---------- --------- ----------- ------
Accumulated Amortization:
As at 1 January 2002 (133) (161) (91) (385)
Exchange movements (18) (24) (13) (55)
Charge for the year - (93) (52) (145)
---------- --------- ----------- ------
As at December 31, 2002 $ (151) (278) (156) (585)
========== --------- ----------- ------
Net book value:
As at 1 January 2002 487 139 105 731
---------- --------- ----------- ------
As at December 31, 2002 1,864 1,352 69 3,285
---------- --------- ----------- ------
Amortization expense related to goodwill amounted to $nil, $26 and $109 in
the year ended December 31, 2002, 2001 and 2000 respectively.
Amortization expense related to software amounted to $93, $90 and $70 in
the years ended December 31, 2002, 2001 and 2000 respectively.
If goodwill amortization had not been expensed in 2001 and 2000 income and
earnings per share would have been as follows: Income 2001: $704; 2000:
$382; Earnings per share 2001: $0.03; 2000: $0.02
F-14
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)8. OTHER ASSETS (CONTINUED)
On March 2, 2001the company's UK operating subsidiary, Vero International
Software UK Ltd, entered into an agreement with Ubiquity Software
Corporation Limited of Newport, South Wales to acquire a part of their
business which provides software and systems for the secure electronic
transfer of CAD/CAM data.
The acquisition was accounted for as a purchase. The acquired assets,
liabilities and results of operations are included with those of the
Company as of March 2, 2001. The total consideration was $361.
On July 1, 2002, the Company's U.S. operating subsidiary, Vero
International, Inc. acquired the Company's Canadian distributor Vero
Tooling Solutions, Inc. for the nominal sum of one dollar. The acquisition
was accounted for as a purchase. The acquired assets, liabilities, and
results of operations are included with those of the Company as of July 1,2002. The excess of the cost of acquisition over the fair value of the
identifiable net liabilities was $ 631, which represents goodwill.
On September 28, 2002, the Company acquired the Machining Strategist 3D CAM
business of NC Graphics (Cambridge) Limited in consideration for the
issuance of 1,250,000 shares of common stock valued at $ 374 and cash of $
1,495. The acquisition was accounted for as a purchase. The acquired
assets, liabilities and results of operations are included with those of
the Company as of September 28, 2002. The excess of the cost of acquisition
over the fair value of the identifiable net assets was $ 613, which
represents goodwill. The results of the Company, giving pro forma effect to
the transaction as if it had taken effect on January 1, 2002, are
estimated:
MACHINING PRO COMPANY STRATEGIST FORMA
$ $ $
Net revenue 11,277 1,083 12,360
Income from operations 341 164 505
Net (loss)/ income (74) 115 41
Earnings per share
- Basic $ (0.002) $ 0.004 $ 0.001
- Diluted $ (0.002) $ 0.004 $ 0.001
F-15
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)11. CAPITAL LEASE OBLIGATIONS (CONTINUED)
Principal and interest payment requirements on capital leases obligations
are as follows:
Year ending December 31,2003 $ 103
2004 $ 95
2005 $ 84
2006 $ 60
------
342
Less: interest payments $ (31)
------
Net present value of capital lease obligations $ 311
------
12. SHAREHOLDERS EQUITY
In May 2002 the Company issued 14,651,166 shares of common stock in
exchange for cash of $4,700.
In connection with the acquisition of the Machining Strategist business a
further 1,250,000 share were issued in September 2002 at a valuation of 20
pence per share.
13. COMMITMENTS AND CONTINGENCIES The Company leases certain facilities and motor vehicles under
non-cancelable operating leases. Future minimum contract commitments under
non-cancelable commitments are as follows:
LEASES
-------
Year ending December 31,2003 $ 340
2004 $ 268
2005 $ 193
2006 $ 92
2007 $ 68
Thereafter $ 34
Rent expense was $250, $148 and $144 for the years ended December 31, 2002,
2001 and 2000 respectively. Development expenses in connection with third
party software agreements amounted to $487, $274 and $333 for the years
ended December 31, 2002, 2001 and 2000 respectively.
Proceedings have been initiated against the Company by NC Graphics
(Cambridge) Limited ('NCG') for the payment of disputed invoices arising
from the acquisition by the Company of NCG's Machining Strategist business,
totalling $172. It is the Directors' view that this claim is without merit
and the Company has advised, through its solicitors, of its intention to
vigorously defend this claim. The Company has notified NCG of its intention
to pursue, as part of these proceedings, a counterclaim for substantial
damages arising from NCG's failure to comply with certain terms of the
agreement relating to the acquisition of the Machining Strategist business.
F-18
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)14. EARNINGS PER SHARE
Basic earnings per share is calculated by dividing net income available to
common stockholders by the weighted average number of common shares
outstanding and does not include the impact of any potentially dilutive
common stock equivalents. Diluted earnings per share is computed by
dividing income attributable to common stockholders by the weighted average
number of common shares outstanding plus the effect of any dilutive stock
options.
The calculation of basic earnings per share is as follows:-
2002 2001 2000
Net income available to common stockholders $ (74) $ 595 $ 356
-------- ------- -------
Weighted average number of common shares
outstanding (000s) 31,228 20,642 20,210
Basic (loss) earnings per share $(0.002) $ 0.03 $ 0.02
======== ======= =======
The calculation of diluted earnings per share is as follows:
2002 2001 2000
Net income available to common stockholders $ (74) $ 595 $ 356
-------- --------- --------
Weighted average number of common shares
outstanding (000s) 31,228 20,642 20,210
Options outstanding 460 477 477
Non dilutive options (460) (334) (334)
Use of proceeds - (112) (85)
-------- --------- --------
31,228 20,673 20,268
-------- --------- --------
Diluted (loss) earnings per share $(0.002) $ 0.03 $ 0.02
======== ========= ========
F-19
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)15. STOCK OPTION PLANS The Company has three forms of option plans available to its employees,
they are: the Approved Scheme, the Unapproved Scheme and the Shadow Scheme.
The rights and restrictions, including options authorised under these plans
vary in accordance with limits and guidelines established by the
Association of British Insurers. Options under the plans generally vest
over 3 years and are exercisable up to 7 years from the vesting date.
The Company treats the excess, if any, between the exercise price and the
estimated fair market value of the Company's stock on the grant date, as
deferred compensation expense to be amortised over the vesting period for
financial reporting purposes. No compensation cost was recognized for the
years ended December 31, 2002, 2001 and 2000, respectively.
The following is a summary of option activity pursuant to the Company's
stock option plans:
2002 2001 2000
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
price * price * price *
Options
outstanding at
beginning of 476,857 41p 476,857 41p 541,857 42p
year
Lapsed (17,000) 50p - - (65,000) 50p
-------- -------- -------- --------
Options
outstanding at
end of year 459,857 41p 476,857 41p 476,857 41p
--------- -------- -------- -------- --------
* Expressed in pence. There are 100 pence per UK Pound Sterling.
The following outlines the significant assumptions used to calculate the
fair value information presented utilizing the Black-Scholes Single Option
approach with ratable amortization:
Risk free rates 5.63% - 5.69%
Expected life 7 - 10 years from
date of grant
Expected volatility 65%
Expected Dividends None
Weighted average grant-date fair value of Options 38p
F-20
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)17. RELATED PARTIES
Vero International Software s.r.l leases its premises at Romano Canavese,
near Turin, Italy, from Mrs. A. Giacinta, the mother-in-law of Mr. E.
Galardo, a director. The rental payments, which are lower than market
value, as the Company has financed the leasehold improvements, were $18,
$15 and $16 in the years ended December 31, 2002, 2001 and 2000.
Mr. E. Miller, a director, is a consultant to Kleban and Samor, P.C.,
Attorneys at Law. The group engaged the services of this firm which acted
on a number of assignments in relation to the Company's business for which
the aggregate of fees amounted to approximately $111, $174 and $81 in the
years ended December 31, 2002, 2001 and 2000. Amounts due and included in
accounts payable were $40 and $28 at December 31, 2002 and 2001,
respectively.
Mrs I Fredericks is Managing Director of Corporate Finance for Westminster
Securities Corporation ("Westminster"), based in New York. In November
2001, the group retained the services of Westminster which acted as
placement agent to secure additional finance for the Company through a
private placement of shares in the Company. Westminster Securities
Corporation is entitled to commission of 7% of the amount raised, payable
on each closing, together with warrants equal to 10% of the amount raised
at an exercise price of $5.4515. Westminster qualifies for commission and
warrants in connection with the convertible debenture and proposed
financing arrangements with Hemisphere Capital described in note 21]. The
aggregate of fees paid during 2002 was $30 (2001: $20).
F-22
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001, AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)19. FINANCIAL INSTRUMENTS
(a) The following methods and assumptions were used by the Company in
estimating fair value disclosures for financial instruments:-
MORTGAGE NOTES
The carrying amounts reported in the balance sheets for these
instruments approximate their fair value as the interest rates are
based on a floating rate.
ACCOUNTS AND NOTES RECEIVABLE
The fair value of accounts receivable due in excess of 1 year is
determined by imputing interest, generally LIBOR plus 2%, over the
estimated period to collect accounts due. Notes receivable in excess
of 1-year approximate fair value as interest rates are based on
floating rates.
The estimated fair value of accounts and notes receivable in excess of
1 year is as follows at December 31, 2002:
CARRYING FAIR VALUE VALUE
Accounts and notes receivable $ 118 $ 118
OTHER ASSETS AND LIABILITIES
The fair value of accounts receivable and accounts payable approximate
their carrying value due to their short-term nature.
(b) MARKET RISK
Market risk exists with respect to changes in foreign exchange rates.
At December 31, 2002, the Company, through its Italian subsidiary, had
mortgage notes of $34. None of this exposure is hedged through
purchasing forward exchange currency contracts. However the Company
has operations in Italy and expects to generate revenues in Italian
Lira. Since the Company's mortgage notes bear interest at variable
rates, it is exposed to movements in interest rates.
F-24
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001 AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)19. FINANCIAL INSTRUMENTS (CONTINUED) (c) CONCENTRATIONS OF CREDIT RISK The Company is exposed to credit risk to the extent that it operates
through a network of dealers. The risk is mitigated by the fact that
dealers do not generally hold inventory. No single end user accounts
for more than 10 per cent of the Company's reported revenues. Two
dealers accounted for approximately 11% and 7% respectively, of total
net revenues for the year ended December 31, 2002.
Financial instruments that potentially subject the Company to
concentrations of credit risk include accounts receivable from its
customers, which are located throughout the United Kingdom, Italy, the
United States and, to a lesser extent, other regions of the world. The
credit risk associated with the Company's accounts receivable is
mitigated by its credit evaluation process, although collateral is not
required. Three dealers collectively accounted for approximately 15%
of net accounts receivable as of December 31, 2002The Company maintains cash balances at large financial institutions,
which do not provide insurance on amounts under deposit arrangements.
The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk on cash.
(d) FORWARD FOREIGN EXCHANGE CONTRACTSThe company enters into forward foreign currency contracts to purchase
and sell foreign currencies to reduce exposures to foreign currency
risks. The forward exchange contracts generally have maturities that
do not exceed 12 months and require the company to exchange at
maturity U.S. dollars, Euros and Japanese Yen for U.K. Sterling at
rates agreed to at the inception of the contracts. The Company uses
forward foreign currency contracts as fair value hedges to mitigate
foreign currency risks related to recognised monetary assets and
liabilities arising on transactions denominated in currencies other
than the functional currency of the Company or its subsidiaries.
At December 31 2002, the fair value of forward foreign currency
contracts in gain (i.e. asset) positions was $802, and the fair value
of forward foreign currency contracts in loss (i.e. liability)
positions was $1,500. These fair values were determined based upon
current forward rates applicable to the remaining terms of the forward
contracts as of December 31, 2002. These currency forward contracts
did not qualify as fair value hedges under SFAS 133. The net gain
(loss) arising from foreign currency forward contracts, which amounted
to $64, $(6) and $10 during the years ended December 31, 2002, 2001
and 2000, respectively, have been included within the consolidated
statements of operations.
F-25
P-->

VI GROUP PLCNOTES TO CONSOLIDATED FINANCIAL STATEMENTSDECEMBER 31, 2002, 2001 AND 2000 ($ AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)20. PENSIONS The company operates a defined contribution pension scheme for employees
based in the United Kingdom. The scheme is funded by the payment of
contributions to an independently administered fund. Contributions were
$57, $43 and $38 for the years ended December 31, 2002, 2001 and 2000
respectively.
21. SUBSEQUENT EVENTS
On January 10, 2003, the Company issued a $1.0 million convertible
debenture ("Debenture" ) to Hemisphere Capital, LLC. The Debenture will
bear interest at 9% per annum, is convertible in certain circumstances into
American Depositary Receipts ("ADRs") of the Company at a price of $4.5429
per ADR, with each ADR representing 20 ordinary shares and will mature no
later than January 10, 2006. The Debenture would be convertible into
4,402,460 ordinary shares subject to anti-dilution and other similar
adjustments.
Under the terms of the Debenture, Hemisphere has the right to subscribe for
between $2,000 and $4,000 of preference shares of the Company ("Preference
Shares") for a period of 120 days after notice from the Company offering to
sell the Preference Shares to Hemisphere, following approval of the
Preference Shares by the Company's Board of Directors and Shareholders. The
Debenture shall become due and payable, if not sooner converted, upon
various contingencies, including failure of the Company's shareholders at
an extraordinary general meeting held for the purpose to authorize the
Preference Shares. The Company has the option to require conversion as of
the final maturity date of the Debentures.
The Company intends to seek the authorization of its shareholders for the
issuance of the Preference Shares at an extraordinary general meeting of
shareholders to be held in July 2003.
F-26
P-->